The Fed and the Ballot Box

Try as we might, we cannot ignore politics in election years. Campaigns creep into our lives through advertisements, yard signs, bumper stickers and casual conversation. The contagion has spread to our discussions of monetary policy: we are often asked whether the Fed will be influenced by the election. We believe not, based on a reading of history and the structure of the organization.

The Federal Open Market Committee (FOMC) is chartered to be apolitical. Seven of its 12 members are Governors of the Federal Reserve System, who serve staggered 14-year terms. While they are nominated by the President and approved by the Senate, their backgrounds are typically well outside the political sphere. The other five voting members are the presidents of the New York Fed and four other regional Federal Reserve Banks. Regional leaders are chosen by the boards of their local Reserve Banks, not through any electoral process.

The Fed’s leaders do not live in isolation. A political lens could be applied to all decisions. But a review of the FOMC’s actions in the January-October interval of past election years reveals a pattern of decisions based on prevailing economic circumstances, no different from non-election years. The Fed’s practice of publishing a specific target rate only began in the 1980s, allowing a review of ten presidential election cycles.

Fed Funds Target Rate