|Man Without Qualities|
Monday, December 29, 2003
It is surely true that Presidential elections are strongly influenced by some of the economic conditions prevailing at the time of the election. The unemployment rate and employment prospects (job security) are probably the two most significant economic factors.
It is also surely true that Federal Reserve interest rate policy has a big effect on many economic variables.
But most knowledgeable observors believe that the economic effects significant to voters that are worked by changes in the Fed's interest rates take one year or more to take hold. For example, a change in Fed interest policy in June of an election year is unlikely to create or eliminate many jobs by the beginning of November - or even a broadbased change in feelings of job security (or anxiety).
Restating the above: Economic conditions prevailing at the time of a Presidential election are mostly correlated to Fed policy prevailing at least a year previously, Fed policy during an election year has much less effect on the outcome of the election than does Fed policy prevailing in the the year immediately before the election year.
So why does Mickey D. Levy, chief economist at Banc of America Securities, scribe a long and detailed article in the Wall Street Journal attempting to show that the Fed has not historically based its policy moves on any attempt to affect Presidential elections by analysing Fed policy moves in Presidential election years? Those moves are a year late and many basis points short to change the opinions of many voters - other than, say, the opinions of economists at fancy investment banks.
Mr. Levy notes, for example:
Conventional wisdom holds that the Federal Reserve is influenced by politics and does not raise interest rates during presidential election years.
Really? Who would have thought conventional wisdom was so out of touch with the common knowledge that interest rate changes take time to work. Perhaps it depends on the conventions one attends. Mr. Levy does note that history refutes this notion. I believe Mr. Levy's historical facts figures, but they seem almost irrelevant to the question of whether the Fed tries to influence presidential elections - since the relevant facts and figures pertain to Fed moves in the immediately preceding years.
Even stranger, Mr. Levy also notes:
Some circles blame the Fed's tight monetary policy for incumbent President Bush's loss to Bill Clinton in 1992, but the record shows the Fed eased its federal funds target dramatically, from 4.4% in December 1991 to 3% in November 1992. This rate reduction, which lowered short rates below inflation, occurred amid moderate economic recovery but a soft labor market with a rising unemployment rate. Criticism of the Fed in the early 1990s should focus on 1990, when the Fed remained stubbornly tight as recessionary conditions unfolded.
But the circles that blame the Fed's tight monetary policy for incumbent President Bush's loss to Bill Clinton in 1992 focus exactly on the Fed's stubbornly tight approach in 1990-1991, which is the period of Fed policy which created the economic conditions prevalent in the run-up to the November, 1992 election.
That the Fed eased its federal funds target dramatically, from 4.4% in December 1991 to 3% in November 1992 did create profound economic effects - but those effects were realized in 1993, the year in which Mr. Greenspan got to sit next to first lady Hillary Rodham Clinton.
Comments: Post a Comment