Did the fed raise interest rates before elections?

The fed funds rate is the interest rate charged for overnight loans between depository institutions and, as such, the US Federal Reserves targets the fed funds rate to manipulate short-term lending.

See, e.g., Maisel (1973), Woolley (1984), Beck (1987), Greider (1989), Hakes (1990), Havrilesky (1995), Woodward (2000) and Chappell et al. (2005). While Maisel (1973) estimated subjectively that the chair has about 45% of the policy-making power in monetary policy decisions, Chappell et al. (2005) estimate a voting weight for chair Burns of 40–50%. The latter also found that committee members were responsive to the positions advocated by chair Alan Greenspan. Romer and Romer (2004a) argue that a Fed chair with sound beliefs might be unable to impose those beliefs on an FOMC with radically different views. However, the experience of the Fed since 1936 has been that the chairman’s views typically dominate policymaking.

See Drazen (2000) for a summary.

More recently, Healy and Lenz (2014) support this seemingly irrational response to current economic conditions in the election year with a known psychological bias: voters intend to judge presidents on cumulative growth but lack information and simply “substitute conditions at the end for the whole”.

For a recent contribution, see Alpanda and Honig (2009), who expand the set of observations by including developing countries. PMCs are more likely to exist because central bank independence is less established in these countries than in advanced economies. The results indicate that advanced economies and developing nations with high levels of central bank independence do not experience PMCs, on average. By contrast, the authors found cycles in developing countries with weak central bank independence.

The Taylor rule suggests an optimal interest rate setting as a response to real and nominal economic variables.

In Anthony Downs’s (1957, p. 28) words: “We assume that [politicians] act solely in order to attain the income, prestige, and power which come from being in office” .

The chair, being a member of the Board, is entitled to remain on the Board for a full 14-year term. However, tradition has it that the chair steps down if a reappointment does not materialize (see Abrams and Iossifov (2006)).

The name of the committee changed over the years. It was called the Committee on Banking and Currency until the end of the 1960s and renamed the Committee on Banking, Housing, and Urban Affairs of the US Senate in 1970. The data can be found in the FRASER database, and recorded Senate hearings for the confirmations of US Fed chairs are listed in Table 10. The critical elections for chairs are listed in Table 11.

The Fed did not always focus on the federal funds rate, but also adopted various monetary policy operating procedures (Chappell et al. 2005). After a failed attempt to characterize monetary policy in terms of some monetary or reserve aggregate under Alan Greenspan, the FOMC adopted the federal funds rate as its policy instrument in the late 1980s. Since then, monetary policy has been characterized by changes in the FOMC’s target for the federal funds rate. Even in periods when the FOMC was not explicitly targeting the federal funds rate, it was concerned about that key interest rate and discussed the likely implications of policy actions for its behavior (Romer and Romer 2004a).

See Rudebusch (1995) for evidence of serial correlation of rate changes.

The Kleibergen-Paap statistic is the HAC-robust version of the Cragg-Donald statistic. Stock and Yogo (2005) recommend rejecting the null that the instruments are weak, and estimates therefore are biased, when the Cragg-Donald statistic is above 10. A major limitation of the Cragg-Donald test is the strong assumption that errors are homoscedastic. For the lack of a better alternative, we apply the Stock-Yogo recommendation.

An overview of how the dummies are constructed can be found in Table 12.

The difference is reflected in the coefficient for “classical” in specification (A1) and the change in interest rates when the president and the chair are affiliated, as manifested in the sum of the coefficients for “classical” and “affiliation” in specification (A2).

We do not report the coefficients for the control variables because of space limitations. The results are available upon request.

We thank an anonymous referee for suggesting this to us.

A preliminary regression without dummies delivers point estimates and standard deviations that are identical to the ones reported in Romer and Romer (2004b).

That is, \(\gamma X=0\) for every claim X forms the joint hypothesis.

That is, \(X+\gamma X=0\) for every claim X reflects the joint hypothesis.

Abrams and Iossifov (2006), Gamber and Hakes (2006) and Kuper (2018) also assess single tenures, but for fewer chairmanships than us.

Only Arthur Burns, Ben Bernanke and Janet Yellen had their reappointment hearings right after presidential elections, while William Martin, Paul Volcker and Alan Greenspan were due for their reappointment hearings after midterm elections.

To clarify: we are interested in the change in the chairs’ responses to incentives that are outside the Fed’s legislative mandate. Hence, the focus for each chair lies on the variables with a \(\gamma\)-prefix. The variables with a \(\gamma \Delta\)-prefix, a \(\Delta\)-prefix or without any prefix are of lesser concern here, and we do not comment on them further. Those sets of regressors are entered solely to avoid an omitted variable bias.

Note that the chair-specific Taylor rule is based on a relatively short period and, therefore, the estimates for the coefficients might be noisier. Their inclusion is justified solely in order to avoid a bias by omitting possibly relevant variables. Hence, we are not interested in them per se; we do not report them here, but they are available upon request.

Nixon won the presidential election in 1968 with the unemployment rate finishing low, but inflation was heating up. With the election over and a Republican president in office, Martin tightened monetary policy to fight inflationary pressure by slashing money growth rates by approximately 80%, but the inflation rate rose to over 6%. With tighter monetary policy in place, the economy entered recession in December 1969. After Burn’s took over the chairmanship of the Fed, monetary policy decidedly became more expansionary (Abrams and Butkiewicz 2012).

Rogoff (1988) called Nixon “the all-time hero of political business cycles” , at least in contemporary US history. See also Safire (1975, pp. 491–495), Tufte (1978, pp. 45–50), Hakes (1990), Drazen (2000), Mayer, (2002, p. 187), and Chappell et al. (2005, ch. 9). In spite of Arthur Burns’ fierce opposition to inflation, the American economy suffered high rates of inflation during his tenure. According to Hetzel (1998), that was attributable to Burns’s erroneous perception of the driving force behind inflation. Judd and Rudebusch (1998) conjecture that the level of the output gap consistently was misestimated in the Burns period. Drawing from the personal tape recordings made during the presidency of Richard Nixon, Abrams and Butkiewicz (2012) report new evidence that Nixon manipulated Arthur Burns into creating a PBC that helped secure Nixon’s reelection victory in 1972. That evidence (corroborated by our findings) provides support for the hypothesis that the excessively expansionary monetary policy conducted during the Burns–Nixon era was not the result of a simple policy miscalculation, but rather was an objective to reduce unemployment in the run-up to the 1972 election based on on Burns desire to remain chair of the Fed.

This result echoes the findings of Abrams and Iossifov (2006) and Kuper (2018).