A new analysis by the Financial Markets Center reveals that the Federal Reserve's Open Market Committee has raised interest rates significantly more in 1999-2000 than in previous presidential election cycles. The Committee is widely expected to raise rates again at its March 21 meeting. Assessing the 16-month period leading up to presidential elections from 1955-1956 to the present, the Center found:
* The one percentage point increase in the FOMC-controlled federal funds rate between June 1999 and February 2000 is more than five times greater than the average change in the funds rate during comparable periods over the past 11 national election cycles. (February is the mid-point in the 16-month pre-election period charted in Table 1.)
* During the previous 11 presidential cycles, only once has the funds rate increased more during the June-to-February period that precedes the election. That increase occurred in 1979-1980, when Paul Volcker's Fed launched a draconian anti-inflation campaign that doomed Jimmy Carter's chances of reelection.
* If the FOMC continues hiking interest rates, it could easily surpass all but one of the 16-month adjustments made during the previous 11 cycles. (Table 3 projects a range of potential changes in the 16-month period, using different interest rate and inflation assumptions.) Recently Fed Chairman Alan Greenspan has indicated that the central bank intends to keep raising rates over concerns about demand-supply imbalances in the economy.
* Greenspan's Fed would have to engage in some epic tightening to top Volcker's 1979-1980 offensive. But if the Fed only boosted the funds rate by 25 basis points on March 21 and held tight until November, its 16-month pre-election adjustment would still produce a change three and a half times greater than the average rate movement during comparable periods going back to 1955-1956.
* Since 1956, the nominal funds rate has risen only 17 basis points on average between the end of February and the end of October in presidential election years. So even if the Fed stopped tightening after its expected 25-basis point hike on March 21, it would still produce a larger-than-average change in the funds rate for the eight-month period directly before an election.
* In projected real terms, the June 1999-February 2000 increase tops all but two changes during equivalent periods since the 1956 election cycle. (Table 2 includes an explanation of the Center's real funds rate projection).
The Center's analysis will be published in the March 21 edition of its newsletter, FOMC Alert, as part of a special section on the Fed's election-year decision-making. Based in Virginia, the Financial Markets Center is a nonprofit institute that provides research and education resources to policymakers, journalists, citizen organizations and other groups interested in monetary policy and financial industry trends. The Center's web site (<www.fmcenter.org>) includes an assortment of analytical and archival materials on FOMC policy decisions.