Investor Insights:
- Elections don’t matter to the Federal Reserve.
- If its efforts fail to ignite growth, the Fed will cut rates — no matter what.
- Here’s why you should expect the Fed to act in 2020.
Some analysts are saying the Federal Reserve won’t act in 2020 because of the presidential election.
In my opinion, that qualifies as the dumbest prediction of the year.
It’s true that the Fed didn’t act in the two most recent election years. But it cut or hiked interest rates in each of the 10 election years before that.
The table below summarizes Fed policy through the election in each year.
In four of these years, the Fed acted weeks before the election.
The most recent example was 2008. The Fed also acted in the high-inflation years of 1976, 1980 and 1984.
Elections don’t matter to the Fed. Here’s what really drives its decisions…
Expect Employment Data to Drive the Fed
Heading into 2020, unemployment is 3.5%. That’s a 50-year low.
The Fed should act if unemployment changes.
If it drops below 3.3%, inflation fears will rise. Then the Fed will raise rates.
If it climbs above 3.7%, recession fears will rise. That would drive a rate cut.
There’s reason to worry: Unemployment is heading up.
The year-over-year change in the four-week moving average of new unemployment claims hit a 27-month high in December.
That could be a one-off spike in the data. But it doesn’t look that way. Claims consistently increased over the last four months.
Expect the Fed to Act in 2020
Right now, the Fed’s working to save the economy from recession.
Officials are pumping money into the economy. They’re using repo markets and other obscure parts of the financial system.
If these subtle efforts fail to ignite growth, the Fed will cut rates.
That may affect the election, but that’s not the Fed’s concern. The Fed only cares about ensuring maximum employment with minimum inflation.
Expect the Fed to act in 2020.
Watch employment data to see when it will act. A summer rate cut seems likely.
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