Kamala, Donald and Jay

The Federal Reserve likes to stay out of politics, but in today’s Jackson Hole remarks, Jerome Powell indicated that the FOMC is prepared to cut rates next month. The Fed’s desire to remain above the political fray has translated into a bias against acting on rates during election years. The Fed does not want to be seen favoring either party, but having missed the inflation warnings, the FOMC is sensitized to keeping rates too high for too long.

Presidents and partisans have jaw-boned or blamed the Fed for various outcomes for generations. This political pressure has, at times, compromised some Fed leaders, who find themselves in a delicate balance between economic policy and political interests. The desire for a more robust economy before a reelection campaign has been a recurring theme, adding a layer of complexity to the Fed's decision-making process.

Since 1994, when the Federal Reserve began announcing its rate decisions in real-time, the FOMC has held rates unchanged just over 80% of the time in May-November. It hiked rates 16.1% of the time and only cut rates once. Five of the nine hikes occurred in 2004 when George W. Bush was running for re-election. The three other hikes occurred during election years when neither candidate was an incumbent. The only rate cut in the months before the elections was a 100-basis point cut on October 29, 2008, when the financial system was on the brink of collapse.

Will a Fed rate cut have any impact on voters? If Trump wins, will the Fed's independence be compromised whether the Fed cuts rates or not?