Washington Policy Research

The Fed’s History of Monetary Policy Moves

As investors watch for whether the Federal Reserve will cut interest rates at its September meeting or wait until the post-election November or December meeting, it is important to note that the Fed easing financial conditions in an election year is not without precedent.

Despite questions about whether monetary policy moves ahead of an election might be considered political, the Federal Reserve has a history of loosening and tightening financial conditions in election years. In fact, the Fed has either loosened or tightened monetary policy during every election year since 1984. This includes quantitative easing (QE) in three presidential elections years, 2008, 2012, and 2020, a more significant monetary policy move than just altering interest rates.

Fed officials are signaling that rate cuts are coming this year. However, if the Fed feels restrained from cutting rates over concerns that it could be viewed as political (particularly in September), it can also clearly forecast its intentions to ease policy as a tool in and of itself. This was done in both 2010 (ahead of a midterm election) and 2012. In 2010, then-Fed Chair Ben Bernanke used his late-August speech at the Economic Symposium at Jackson Hole, Wyoming to communicate that QE2 (the Fed’s reinvestment of principal payments on agency mortgage-backed securities and purchase of $600bn in Treasurys) would take place after the midterm elections that November.  While the Fed did not formally launch QE2 until the day after the election, Bernanke had clearly signaled to market participants what was coming well before the election.

Similarly, in September 2012, eight weeks before the presidential election, the Fed announced that it would engage in its third round of bond purchases of $40bn in mortgage-backed securities each month (QE3). Those began immediately to provide more accommodative financial conditions. Therefore, the Fed has options. If it cannot cut ahead of the election, it can clearly telegraph its intentions to provide guidance for the markets.

It’s important to note that the US Treasury would benefit from the Fed cutting rates as net interest costs continue to balloon with elevated interest rates. It is more expensive for Treasury to finance the federal debt at these higher rates, and as the federal government spends more on interest costs, the US budget deficit continues to grow. In March 2022, when the Fed initiated its first rate hike this cycle, net interest costs were 8.8% of federal tax revenues. In July 2023, when the Fed last raised rates, that metric was at 14% of tax revenues. It stands at 17.7% today and is beginning to pressure other portions of the federal budget.

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