Are Central Bankers Biased?

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

Conclusion

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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