Interest Rates and Elections
The Federal Reserve’s Federal Open Markets Committee (FOMC) finishes its May meetings on monetary policy today. The Fed is expected to raise interest rates by 50 basis points, which would be the first rate hike of more than 25 basis points since 2000.
Raising interest rates during an election year normally is an unwelcome phenomenon for the incumbent party in the White House since hikes mean consumers will pay more for everything from homes to cars and since the increases will make borrowing on credit cards more expensive. Rate hikes also impact the stock market (as we have seen this week and last, even rate hike anticipation causes stress) and can erode economic growth. But this election year, the party in power is facing record jumps in inflation, the likes of which have not been seen in decades. (As National Public Radio explains, interest rate increases are meant to tamp down on consumer demand and, therefore, the price increases that occur when demand outpaces supply.)
Consumers want policymakers to do something about rising prices, but how are the Fed’s actions likely to impact Election Day results? Let’s look to history for our guide.
The History of Fed Rate Increases in Election Years
As noted above, today’s 50 basis point increase, should it come to pass, will be the first increase of that size in 22 years. But the Fed has raised interest rates in smaller intervals in the last quarter century—and it has done so in election years. In fact, as CNN Business reported earlier this year, “To the dismay of then-President Donald Trump, the Powell-led Fed raised rates three times in 2018 before the midterms, including one hike in late September.” The Fed also raised rates in December 2018, right after the election.
Readers might recall that Democrats picked up 41 seats in the House that year and won the House nationwide popular vote by 8.6 percent. They did so well that they took control of the chamber. Republicans did pick up two seats in the Senate, however, keeping their majority, but clearly President Trump had reason to be worried.
Let’s go back a little further now—to the hyperinflation of the 1970s. As The Balance explained, inflation began to increase rapidly in March 1973 when President Richard Nixon untethered the dollar from the gold standard. In fact, the inflation rate nearly tripled by December 1974. To combat rising prices, the Fed increased its funds rate from seven percent in March 1974 to 11 percent by August 1974. (By contrast, the current target funds rate stood at just 0.5 percent before the Fed’s May announcement.)
President Gerald Ford, a Republican, was in the White House at this point, and voters seemed to blame him, not Congress. Democrats had majorities in both the House and Senate and the party increased those majorities substantially as the Fed worked to combat inflation. Democrats added four seats to their Senate majority and controlled 60 seats to Republicans’ 38 post-election. (There were two independents in the Senate at that time; one who caused with Republicans and one who caucused with Democrats.) That was not all, though. Democrats also came away from the 1974 midterm elections with a supermajority (more than two-thirds of seats) in the House. The party won the nationwide popular House vote by a margin of 16.8 points and netted 49 seats.
Of course, this election also came right after Watergate. That factor obviously played a large part in Democrats’ landslide, but rising rates and inflation almost certainly were on Americans’ minds as well.
The Fed funds rate remained relatively stable in the 1976 and 1978 elections, but the respite wouldn’t last for long.
Chair Paul Volcker took over the Fed in August 1979 and he raised rates significantly. Indeed, on Oct. 22, 1979, the Fed went from a 13 percent rate all the way to 15.5 percent. Then in 1980, as The New York Times reported, the Fed continued to target the growth of the money supply “as the best means to control inflation.” By March 1980, the Fed funds rate was 20 percent. The FOMC eased up over the next several months, but the rate was still at 12 percent before Election Day.
That year Ronald Reagan not only took the White House from Jimmy Carter, Republicans gained 34 seats in the House. (Democrats still retained a majority with 243 seats to Republicans’ 193 seats, however.) The GOP also netted 12 seats in the upper chamber of Congress, enough to give them the majority for the first time since 1955. Prior to the 1980 elections, there were only four occasions in U.S. history (1920, 1932, 1946, and 1958) where 10 or more Senate seats changed hands in one election.
A respite came again in 1982 when, as The Times recalled, “The Fed eases off the monetary brakes, allowing interest rates to fall and the economy to begin a strong recovery.” The Fed fund rate also remained relatively stable in the 1984 and 1986 elections.
Inflation began to rise again in the late 1980s as President Reagan was getting ready to leave office. Before exiting the White House, President Reagan nominated Alan Greenspan to be chair of the Fed. Greenspan reacted to rising inflation with a sharp increase in interest rates. The Fed funds rate went from 6.25 percent in February 1988 to more than eight percent that August.
The outcome of the election was somewhat of an anomaly. Despite the rate increases, there was no major shift in Congress that year. Democrats picked up just two seats in the House and one in the Senate. The party already had been in control of both chambers of Congress.
Rates fell in 1992, but Republican President George H.W. Bush lost the White House. That defeat is largely blamed on the fact that he broke his pledge not to raise taxes – fiscal policy rather than monetary policy.
The Fed was back to raising rates in 1994 when President Bill Clinton and his Democratic majorities in the House and Senate faced the midterm election cycle. There were many factors at play in this campaign—unpopular tax increases (including a gas tax hike), the North American Free Trade Agreement, and the Clintons’ plan for healthcare—but the election results were resounding: Democrats lost their House majority for the first time since 1952. Republicans gained 54 seats in the lower chamber of Congress. They also gained eight seats in the Senate, enough to take control of that body as well.
The Fed cut rates in 1996 and 1998, and raised them again in 2000. Republicans lost two House seats that year and four in the Senate, but took the White House—barely.
No matter how you slice it, even if inflation is a concern, voters have been in grumpy moods when the Fed has raised rates in an election year. That’s why Republicans will continue to harp on this issue for the next six months.
But rate hikes and inflation won’t be their only criticisms of the Fed and the White House.
Get Ready to Hear More about Fed Overreach
While he is retiring and is not on the ballot this year, Senate Banking Committee Ranking Member Pat Toomey (R-Penn.) has been raising the hackles of Fed overreach for months. We expect more Republicans to pick up this theme as the country gets closer to Election Day.
In May 2021, Sen. Toomey sent a letter to three regional Fed presidents, alleging that they had involved their banks in “politically charged issues” that are beyond the Fed’s control. Specifically, the senator requested that the presidents of the Atlanta, Boston, and Minneapolis banks hand over documents about each bank’s involvement in “racial justice issues.” This April, Sen. Toomey wrote a letter to the head of the Minneapolis Fed, Neel Kashkari, criticizing his involvement in a push to guarantee quality public education for all Minnesota children.
Most notably, however, this winter Sen. Toomey and his fellow Republicans used their concerns about the Fed’s activities regarding climate change to block the confirmation of Sarah Bloom Raskin to be the Fed’s top regulator. Prior to her nomination, Bloom Raskin had suggested regulators “ask themselves how their existing instruments can be used to incentivize a rapid, orderly, and just transition away from high-emission and biodiversity-destroying investments.” Raskin ultimately asked President Biden to withdraw her nomination when it became clear that all 50 Republican senators – and at least one Democrat – would oppose her confirmation vote.
Outside the beltway, Republicans’ criticisms seem to be having their intended effect. In 2021, a Gallup poll found the majority of Americans (55 percent) said they had confidence in Fed Chair Jerome Powell—who himself is up for renomination to his post—to do what is right for the economy. In a poll released this year, however, only 43 percent said they have confidence in Chair Powell. The number of Americans who said they had confidence in congressional Republicans remained stable, meanwhile.
One metric that might be on incumbent Democrats’ side: Americans do expect interest rate increases, and soon. According to a Gallup survey taken earlier this year, 78 percent of Americans said they expect interest rates to rise a little or a lot this year.
But expectations are different from reality, obviously. The White House may know what is coming—and they may believe interest rate increases are the right thing to combat inflation—but that doesn’t mean they aren’t worried about the political impact of the Fed’s forthcoming rate increases.