How do US elections impact monetary policy?

As the November election approaches, two common perceptions we hear often from investors are 1) The Fed will try to frontload rate cuts to avoid changing policy too close to the election in November, which could appear political, and 2) The Fed is biased to ease policy more than usual this year to help the incumbent.

Neither of these claims is unfounded, and the Fed has been caught in political crosshairs before. However, the 2024 presidential election does not change our expectation for monetary policy based on economic fundamentals. We expect the Fed to start lowering rates in June, and at every meeting thereafter this year.

The Fed has both tightened and eased policy in close proximity to elections in November, and we find no easing bias. If data are strong enough to prevent the Fed from cutting policy rates until November, they may very well consider refraining from making their first policy move at the November meeting (two days after the election) so as not to signal great urgency.

Elections do matter, because of the economic uncertainty they generate, and potential policy changes. Policy proposals from leading presidential candidates are both fiscally expansionary. More restrictive trade and immigration policies under Trump could be perceived as more inflationary. 

Elections can also impact monetary policy through the president’s nomination of the Fed Chair. The risk of an unorthodox candidate, whose policy-making could be directly influenced by the president, exists. But the Senate has the final say in nominating the Chair, and there is a common understanding among Senators that Fed independence shall be preserved.