Does the Fed Change Monetary Policy in an Election Year?
The short answer is yes despite misconceptions the Fed may stand down due to a pending election. While the Fed often pauses in the month or so prior to the November election, the Fed has changed policy (either raised or lowered rates or stopped or started quantitative easing [QE]) in every election year since at least 1968, and we don’t expect anything different in 2016.
Will the recent equity market pullback deter the FOMC from acting at this meeting?
As of Friday, January 22, 2016, the S&P 500 has declined by nearly 6% since the start of 2016, and was down more than 8% since the Fed’s rate hike on December 16, 2015. More importantly, since early December 2015, financial conditions have tightened [Figure 4], leading some market participants to suggest the Fed may have to address the market turmoil in this week’s statement. The tightening in financial conditions came via wider credit spreads, lower energy prices, increased equity market volatility, and a stronger dollar. We note that while conditions have tightened over the past few months, they remain far easier than they were in early 2015, and never even got close to where they were during the 2007 – 09 financial crisis.
John Canally is chief economic strategist for LPL Financial.