The Federal Reserve's decision this week to cut interest rates by 50 basis points marks the start of the central bank's easing cycle at the cusp of the closest U.S. presidential election in nearly half a century.

While interest rate policy is rarely set in stone during an election year, starting a new rate-cutting cycle less than 10 weeks before Election Day has only happened twice before - in 1976 and 1984.

The Fed is an independent federal agency, and Chairman Jerome Powell and other policymakers have consistently said political considerations, including the upcoming election, do not influence their rate decisions at all.

“This is the fourth presidential election that I have experienced in my time at the Fed,” Powell said at a news conference following the Fed’s policy meeting in late July. “Anything we do before, during or after the election will be based on the data, the outlook and the balance of risks and nothing else.”

Not everyone believed him.

Republican presidential candidate Donald Trump said earlier this year that he thought the Fed might cut interest rates to help Democrats win in the Nov. 5 election. Trump said last month that the president should have a say in the Fed's decisions.

Vice President Harris, the Democratic presidential candidate, has said only that she would respect the Fed’s independence. “As president, I would never interfere with the decisions made by the Federal Reserve,” she said last month.

Interest rate changes in election years

Since 1972, the Fed has changed interest rates in all but two presidential election years, and its actions have been largely divided into two categories: raising and lowering interest rates.

The Fed’s policy rate has risen in five election years and fallen in six. In most cases, the changes were part of a cycle that began a year or more before the election year.

In four of the five election years in which interest rates rose, the incumbent president or the party that controlled the White House won reelection.

The exception was in 2000, when Vice President Al Gore failed to retain the White House for the Democrats and George W. Bush recaptured it for the Republicans. Between January and the end of October of that year, then-Fed Chairman Alan Greenspan raised rates by 1 percentage point, though the last rate hike came in June, about five months before the election.

Meanwhile, the incumbent president or incumbent party challenger won in five of the six election years when rates fell.

The exception was 1996, when incumbent Democrat Bill Clinton won a second term. Also under Greenspan, rates were cut by 25 basis points between January and Election Day, though the last cut came early that year.

The most they have risen in an election year before Election Day is 2.56 percentage points. That happened in 1984, when the Fed under Volcker was still struggling to eliminate the remnants of high inflation. Republican Ronald Reagan won reelection in a landslide.

The biggest rate cut was 2.75 percentage points in 2008, when then-Fed Chairman Ben Bernanke was slashing rates to cushion the blow of the global financial crisis. Barack Obama recaptured the White House for the Democrats.

Since 1972, the only two presidential election years without a rate change were 2012 and 2016. Obama won reelection in the former, and Trump won the latter, retaking the White House for the Republicans.

How interest rates move in election years and which candidate wins

An election year kicks off a rate-cutting cycle

While election-year rate changes are common, the start of a brand new rate-cutting cycle (a series of rate cuts that follows one or more recent rate increases or a pause in rate changes for at least five months) is not.

Before the Fed's rate decision this week, there have been four times since the 1970s when a rate cut cycle was initiated in an election year, three of which resulted in the victory of the challenger of the ruling party.

The Fed's rate-cutting cycle began in the election year

A recent example is the last presidential election in 2020. At the start of the COVID-19 pandemic, the Fed, under Powell's direction, cut interest rates twice in March of that year by a total of 1.5 percentage points, bringing the policy rate to near zero. Democrat Biden narrowly defeated Trump in that election.

The last time the Fed cut rates closer to election day than this year's was in 1976, when Arthur Burns' Fed began cutting rates four weeks before Election Day. However, it's unclear how much of a difference that made in Democrat Jimmy Carter's victory over incumbent Republican Gerald Ford, as the rate decision was not publicly announced in time.

Article forwarded from: Jinshi Data