Mitchell’s Musings 10-31-16: Sitting Out the Election
Daniel J.B. Mitchell
The Federal Reserve, on and off during the 2016 presidential election campaign, has been accused of following a policy aimed at helping Hillary Clinton by keeping the economy artificially afloat. So what has been the recent history of Fed policy, particularly during the election cycle? It’s actually not all that hard to interpret the available data.
The chart above shows the “adjusted monetary base,” essentially the credit injected by the Fed into the broader economy. What we observe is a remarkable break from the past trend in the midst of the Great Recession and then various surges and pauses thereafter. Particularly in a period in which short-term interest rates were stuck near nominal zero, it makes more sense to judge monetary policy by what happened to the base than by changes in interest rates.
There are – as can be readily seen – distinct periods of monetary policy depicted on the chart. It is, of course, interesting to analyze the details of who said what at meetings of the Open Market Committee, and what outside observers were citing as important developments at those times. But the chart provides us with an after-the-fact general overview that cuts through the noise. Below is a listing of what we can see, combined with labor market conditions as measured by unemployment:
- Sept. 2008 – Jan. 2009: Surge. Unemployment rate rises from 6.1% to 7.8%, seasonally adjusted. This period contains the 2008 election and a general collapse of the financial sector which was rescued through various “bailout” policies.
- Jan. 2009 – Aug. 2009: Pause: Unemployment rate rises from 7.8% to 9.6%. New president takes office. The Fed seems to want to see what the impact of its previous surge would be. But the economy continues to weaken. The surge prevented financial collapse but did not avert a severe downturn.
- Aug. 2009 – Mar. 2010: Surge: Unemployment rate rises from 9.6% to 9.9%. The Fed – having observed the slide and the general poor economic outlook - tries more stimulus.
- Mar. 2010 – Jan. 2011: Pause: Unemployment stabilizes (drop from 9.9% to 9.1%), but the labor market remains very soft. The previous surge delivered less than might have been hoped for.
- Jan. 2011 – July 2011: Surge: Unemployment continues at its high level (9.1% to 9.0%).
- July 2011 – Dec. 2013: Pause for a year and a half to see impact of prior surge: Unemployment drops from 9.0% to 6.7% as Fed essentially sits out the 2012 presidential election.
- Dec. 2013 – Sept. 2014: Surge. The Fed concludes that – since inflation remains low – that the unemployment rate could be pushed down further. Unemployment drops from 6.7% to 6.0%.
- Sept. 2014 – present: Pause. Unemployment drops from 6.0% to 5.0%. Fed implements a token slight rise in interest rates. Beyond that step, it essentially sits out the election. Inflation remains low.
It is hard to look at this Fed policy history from 30,000 feet and conclude there is some active manipulation of monetary policy around election time. In the 2008 case, with the financial sector and the economy collapsing, of course the Fed became active. But it essentially sat out the 2012 election and has repeated that behavior in 2016.
 The adjustments referred to in the adjusted monetary base involve changes in reserve requirements. None occurred during the period shown on the chart. The monetary base is currency in circulation plus deposits at the Fed by banks.