Introduction
Few central bank watchers believe that the electoral cycle will significantly alter the direction of monetary policy. However, there is speculation as to how elections in the US and UK might affect the timing of interest rate moves in the coming year. The Federal Reserve has already indicated a willingness to cut rates in 2024, while the Bank of England has been more cautious in its approach. Nonetheless, markets anticipate rate cuts from both central banks in a year that includes important elections.
Central Banks and Politics
Both the Federal Reserve and the Bank of England emphasize their independence from the political process. However, they cannot entirely ignore the potential political consequences of their actions. The timing of credit policy changes just prior to an election may be viewed skeptically and could impact public perception of the central banks’ objectivity. Nevertheless, the effects of rate changes take time and are often priced into markets well in advance. While the optics of impartiality surrounding rate recalibration may cause hesitation before an election, the historical pattern suggests that rate policy trends remain consistent regardless of the electoral cycle.
Possible Rate Cuts and Electoral Timing
Looking ahead to next year’s US presidential election, there are indications of a potentially tight race. The Federal Reserve forecasts a “soft landing” for the economy with subdued inflation, but futures markets are pricing in rate cuts before the election. If the Fed were to align with market expectations, it would need to make 50-basis-point cuts to match current forecasts. For the Bank of England, the situation is more complex due to uncertainties surrounding the timing of UK elections. However, market expectations point to rate cuts in May, August, September, and by the end of 2024. The potential gap between the September and November meetings may provide some cover for the Bank of England.
The Broader Monetary Policy Picture
While elections may temporarily impact monetary policy, they do not fundamentally alter its trajectory. Nevertheless, interest rate decisions can have political implications, particularly in relation to inflation targets. Economists suggest that the Fed’s success in achieving its 2% inflation target next year could boost the electoral prospects of the Democratic Party. However, the primary goal of the Federal Reserve remains focused on achieving its inflation target rather than favoring any political party.