In the world of central bank policy, a world intricately connected with the investment banking universe, a key issue keeps resurfacing (recently, the issue has come to the fore more prominently).  The issue is central bank independence, or more particularly, whether the Federal Reserve is playing politics with interest rates.

A number of potential Republican presidential candidates have suggested the current Chairwoman, Ms. Yellen, has kept interest rates extraordinarily low for so long as a political favor to President Obama, the man who appointed her to the post.

Among the Republican presidential hopefuls who have mentioned Federal Reserve policy are Mike Huckabee, Chris Christie, Rand Paul, Donald Trump, Rick Santorum, and a few others.

Some of the hopefuls have simply mentioned the harm the ultra-low interest rate environment is causing seniors and low-income individuals through reduced interest income.  Others have been stronger in their points, specifically stating that the Fed is playing politics with interest rates.

Is there any evidence to back up the Republican hopefuls’ observations?  Here’s a look.

A History of the Federal Funds Rate by President

As a start, here’s a look at the federal funds rate by president. This view doesn’t appear to show any favoritism, at least on the surface.

Rates generally rose through the 1970s and early 1980s. Once high inflation was beaten, rates generally floated lower, rising and falling with the state of economic activity.

Federal Funds Rate, Color Represents History

A Look at the Federal Funds Rate by Party

Next, here’s a look at the federal funds rate by party.  The picture is a little less ambiguous.

It appears that during Republican Administrations, the federal funds rate was more volatile and, it also looks as if the Fed was more likely to raise rates during Republican administrations.  This is checked next.

Federal Funds Rate, Color Represents Party

A Look at the Median and Average Federal Funds Rate by Party and Rate Hikes by Party

Given the background by president and party, here’s a look at the federal funds rate by party according the median federal funds rate (the median is what would happen most often), the average federal funds rate, and rate hikes. Interestingly, these three views appear to show that the Republican hopefuls may be on to something.

When looking at the median, the median federal funds rate is about 1% lower during Democratic administrations.  That’s about a 27% advantage.  It’s gigantic in the world of finance.

The second figure is a look at the federal funds rate on average.  This view shows about a 1.6% advantage for Democratic administrations.

The third figure is the number of rate hikes by party.  Of the past 77 rate hikes, 59 have occurred during Republican administrations.  That’s a giant difference.

4 - Median FF by Party

Average Federal Funds Rate by Party

Rate Hikes by Party


Recently, there’s been renewed interest in monetary policy.  In particular, some have questioned whether the Federal Reserve is playing politics with interest rates.

Now, it’s possible that the Democratic administrations needed the help.  Then again, it’s also possible that the politics explains some of the disparity, as some of the Republican presidential hopefuls have clearly stated.  It’s also possible that no politics go on at the Fed.  The latter, however, does not appear to be supported by the data shown here.

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The U.S. jobs report came in quite good this month at +271K compared to the +160K the market expected.

MM Job Growth Sources: Econometric Studios, BLS

Even more amazing, full-time employment – a key indicator of the real strength of economic growth – came in +540K.  In the past two months, full-time employment in the U.S. has expanded by an incredible 1.12 million.  That’s over just two months.

Over this same period, part-time employment has declined by 716K.

US Jobs Picture Full-Time, Part-time and Total, 2011-2015 Source: Econometric Studios, BLS

In the past two months, one can confidently say that the American job market is on fire.

The strength of the American job market poses the question: how are jobs in the U.S. doing compared to jobs in Europe, China, Russia, Brazil, and a few other large political areas? (Note that some large countries, such as India, are left off of the analysis because employment data out of the country lags far behind.)

Which country has experienced the largest expansion in employment? Here’s a look.

Jobs Across the Globe

The next graphic looks at employment growth in the United States, the Euro Area, China, Japan, Germany, the United Kingdom, France, Brazil, Italy, Russia, Canada, Australia, South Korea, and Spain. The figures plot the percentage growth in jobs since 2009 – the approximate point when the global economy bottomed out.

Which of the countries listed would you guess experienced the strongest employment growth?

Interestingly, on top is South Korea.  Since 2009, businesses in South Korea have added almost 13% to their employee base. In second and third places at about 9% each are the United Kingdom and Australia. Rounding out the top 5 are Brazil (up about 8%) and Canada (up about 6%).

On the other end, the bottom 5 countries for employment growth are Span (still down 10% from its January 2009 figure), Italy (down about 3%), France and Japan virtually flat, and the European 18 (up a about half of a percent).

Employment Growth since 2009 Sources: Econometric Studios, Haver Analytics

What’s Behind the Strength/Weaknesses?

With the percentage growth picture known, what explains the strength in job growth in South Korea, the U.K., Australia, Brazil, and Canada?  Why are businesses so weak in Spain, France, the Europe 18, Italy, and Japan?

The answer, unsurprisingly, lies in a web of interconnected factors.  Businesses are likely adding jobs at a faster pace in South Korea because of its connection with China, and having a strong technology sector.  A different story holds for the U.K.  Instead of technology, although technology is certainly important in the U.K., the finance sector appears to be a major part driving the employment growth in the U.K.

On the other end, business growth is weak in Spain, France, and many other European countries for a number of reasons, including an internationally expensive labor conditions, regulatory environments, and large government sectors.  The story behind Japan is similar to the U.K., although demographics may be an even greater force in the world’s third largest economy.


Overall, job growth across the globe is quite varied.  In looking at job growth by country since 2009 for the largest economies in the world (by political boundaries), businesses in South Korea come out on top, with employment up about 13%.

On the other end, business in Spain is the weakest, still down 10% over the same period.

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In the investment banking universe, there’s no more contentious issue than Federal Reserve policy.  This week’s interest rate decision will be no different.

On Wednesday, the Federal Reserve is set to announce its decision on the Federal Funds target rate.  Unless the Fed shocks the world, and with Janet Yellen at the helm that’s a very unlikely scenario, the Fed will keep the target rate where it’s been for the past over 8 years.  The rate is currently set at between 0% and 0.25%.

The incredibly loose Fed presents an interesting question.  Which of the following two will jump up first?  Will the Fed increase its holdings of Treasuries or will it raise the Fed Funds target rate?

First, a Look at the Treasury Holdings

The following graphic is a look at Treasury holdings of the Federal Reserve from 2003 to 2015′s most recent figure.  Over this period, there have been 3 jumps in Treasury holdings and 1 drop.

Addressing the drop first.  From November 2007 to June 2008, the Federal Reserve’s holdings of Treasury securities declined by about $300 billion to ~$480 billion.  The drop stemmed from the onset of the global financial crisis, with the Fed selling assets to individuals looking for safe harbor securities.

Next, the 3 jumps – which all occurred for generally the same reasons.

The first jump occurred from March to September 2009, with the Fed’s holdings expanding by almost the $300 billion it sold the prior year.  The purchases occurred as an attempt to lower long-term borrowing costs and encourage economic activity.

The second jump began in August 2010 and lasted to October 2011.  Over this period, the Fed’s holdings exploded by almost $1 trillion, to $1.7 trillion.

The third jump lasted the longest, from December 2012 to October 2014, with the Fed purchasing another about $800 billion in Treasury securities.

Overall, the most recent accounting has total Federal Reserve Treasury holdings at $2.464 trillion, about $1.7 trillion above where it was prior to the global financial crisis.

Treasury Holdings of the Federal Reserve

Second, a Look at the Fed Funds Target Rate

The following graphic is a look at the Federal Reserve loosening cycles since the 1970s.  A loosening cycle begins when the Fed starts lowering interest rates, and ends when the Federal Reserve starts raising interest rates.

As indicated, the current cycle isn’t exactly a short one.  To the contrary, the current loosening cycle is about 3,000 days long, much longer than the previous longest loosening cycle that began in 1989 and ended in 1994.  This cycle lasted about 1,700 days.

Loosening Cycles by Start Year

So, Which Comes First?

The question regarding which comes first depends partly on the state of the American and global economies and partly on the personalities in charge of Federal Reserve policy.  Given that global economic conditions are generally weak, and the sitting chairwoman of the Federal Reserve has a large bias towards loose monetary policy, it’s a reasonable bet that the Fed starts buying Treasury securities before it begins addressing much needed normalized Federal Reserve interest rate policy.


The Federal Reserve is set to announce an interest rate decision on Wednesday.  Unless the financial world is caught completely off guard, it is likely that the Fed will leave the Federal Funds target rate exactly where it is, and where is has been for 8 years.

The incredibly loose Fed raises an interesting question, especially in light of chairwoman Janet Yellen’s bias for loose monetary policy.  Which will happen first – Will the Fed enter another round of Treasury hoardings, or will the Fed begin to raise interest rates?

Although the baseline presumption among economists is that a rate hike is pending, there’s a good deal of reason to believe that more money printing to buy Treasury securities will be the next step of the Federal Reserve.

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