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they would manipulate interest rates in exactly the way they have done since John Kennedy was president.
Here's how it works (hoping I can say this simply and concisely enough to make sense):
The state of the economy during the year before an election has a significant affect on how people vote. That year is the part of campaigns that people pay attention to, and longer than a year before, they forget. It's what have you done for me lately? I'll call this 12-month period from election day backwards to 12 months before election day the "attention span period."
Also, economists generally agree that it takes about 6 months to 18 months for Fed interest rate actions to show up in the state of the economy. I'll call this period of 6-18 months the "efficacy period."
Now, *if* the Fed wanted to influence presidential elections, it would have to act during a window of opportunity which would make its actions have their effect during the "attention span period." Thus the window of opportunity extends from a minimum of 6 months before election day (0 months of attention span + 6 months of efficacy time) to a maximum of 30 months before election day (12 months of attention span + 18 months of efficacy time).
Also, it would want to stimulate the economy for the benefit of its preferred party when that party is in power and would want to depress the economy to the detriment of the other party when that party is in power.
Here's a summary of Fed interest rate actions during the windows of opportunity periods from 1960 through 2004. I list the number of increases and decreases in the discount rate and the total number of basis points of increase and decrease:
Democratic president: Increases: 23 Total increased basis points: 1175 Decreases: 4 Total decreased basis points: 125
Republican president: Increases: 3 Total increased basis points: 125 Decreases: 28 Total decreased basis points: 1050
Notice how it is completely opposite. But it's not just the 44-year aggregate that is compelling. In EVERY SINGLE PRESIDENTIAL TERM since 1960, the net effect of Fed discount rate actions during the window of opportunity for that term has been to stimulate the economy during Republican terms and to depress it during Democratic terms.
During the other 24 months of presidential terms, the Fed's actions are approximately equal regardless of the party in power, but I'm not going to bother to copy those details here. I have a more thorough explanation and analysis plus all the gory details of rate changes in a PDF file that is not online anywhere, but I'd send it to anyone who's interested. Use the "email to this author" button to ask me for it if you want it. (I've never used that DU facility, but I assume it works.)
A couple disclaimers: I did this analysis in June 2004 and there may be one rate increase not included there, but the conclusions still stand. I did it all manually, so there may be manual error, but I have double-checked it. I got the list of rate changes from the St. Louis Fed's web site. Before 1960, the Fed acted much less frequently on interest rates, so I didn't carry the analysis back any further than that.
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