Market observers (investment bankers chief among them) have long debated how political Federal Reserve policy is. Some economists think officials at the Federal Reserve are completely immune from political pressure, akin to the way some legal observers think Supreme Court justices are impartial observers. Others, perhaps the more enlightened ones, see Federal Reserve policy as almost completely political, similar to the way many legal observers see political agendas out of the supposedly impartial opinions of Supreme Court justices.
Here’s a look at what the Federal Funds target rate has been by U.S. President.
Although bunched together closely, one can clearly see trends by President.
The current president is the most obvious outlier. Since he took office in January 2009, President Obama has yet to see the Federal Reserve increase the Federal Funds target rate. Instead, President Obama has experienced consistent losing throughout his Administration. For some observers, this is no surprise given that the sitting president appointed the the current chair of the Federal Reserve.
Interestingly, the figure shows much less consistency in the Federal Funds rate for Obama’s predecessor – Bush II. In the first year of Bush II’s presidency, the Federal Funds rate was decreased from about 6 percent to about 1.75 percent. The Federal Funds rate then floated around bottom for the next three years. After spending three years in the trough, Mr. Greenspan’s Federal Reserve began tightening interest rates, with the Federal Funds rate going from a low of 1 percent to about 5 percent over the course of the next two years. The rate then spent the next year at about 5.25 percent, after which the Federal Reserve began decreasing the target rate at a fairly rapid pace to end Bush II’s presidency.
Bush II’s presidency was preceded by President Clinton. Surprisingly, although the 90s was full of heavy equity price appreciation, the Federal Funds target rate was much less volatile during Clinton’s presidency than it was during Bush II’s administration. Clinton came into office with the Federal Funds target rate at 3 percent. The rate doubled over the next two years to 6 percent. After reaching 6 percent, the Federal Funds target rate spent the remainder of Clinton’s presidency floating in the narrow 5 percent to 7 percent range.
Bush I consistently saw the Federal Reserve decrease the target rate during his time in office, going from 9 percent to 3 percent over his four years.
During Reagan’s time in office, the Federal Reserve only increased the Federal Funds target rate for a few months at a time. The most severe was early in Reagan’s presidency, when Mr. Volker increased the rate from about 14 percent to as high as about 30 percent (third and fourth months of Reagan’s presidency). Besides Mr. Volker’s defeat of the Carter years’ hyperinflation, the Federal Funds rate trended downwards during most of Reagan’s time in office.
Here’s another look at the numbers with a different view. Each row represents each of the past 11 U.S. presidents (please note the different vertical axes).
So, any politics involved in the setting of the Federal Funds target rate? It’s impossible to tell from the graphics or discussion if there is a bias. Here’s a simple regression result to test further.
Simple Probit Regression Check
The probit regression results given below has as the dependent variable whether the Federal Reserve was in a general tightening (=1) or loosening cycle (=0). The predictor is whether the president at the time was a Republican (=1) or Democrat (=0).
Interestingly, the -0.026 indicates that, in general, Republican presidents generally see less Federal Reserve tightening cycles than Democratic presidents. The results, though, are not statistically significant at the 95 percent level, nor is the model a good fit. Interesting though.
Overall, although there may be politics behind the setting of Federal Reserve policy, in particular the Federal Funds target rate, it’s hard to show by just looking at the target rate by U.S. president.