Even as speculation had built up that the “apolitical” Fed would not dare to hike rates ahead of the election to avoid a market swoon, one which would significantly boost Trump’s presidential odds, so far nobody – either on the left or the right – had suggested to Yellen not to hike rates before November 8, for one simple reason: it would immediately crush the scripted narrative of an independent Fed (something which Fed governor Lael Brainard apparently was unaware of when she donated repeatedly to the Hillary Clinton campaign), a narrative which benefits both republicans and democrats who can pretend they are busy in Congress simply by pointing at the all time high in the S&P500, which alas is simply a function of global asset bubbles.
However, that changed earlier today when, just one day after Janet Yellen’s closely watched Jackson Hole speech which may or may not have opened the door to a September rate hike, Barney Frank – one of the architects of the 2010 Dodd-Frank “Wall Street Reform” act – and a staunch supporter of Hillary Clinton, told The Hill it would be a mistake for the Federal Reserve to raise interest rates before the election.
Frank advised the Fed board not to risk destabilizing markets and perhaps the broader economy a few weeks before Election Day.“I think it would be a mistake to do it this close to the election,” Frank told The Hill. “It will be interpreted, over interpreted.”
What he really meant is that a crash taking place within 3 months of the election would boost Trump’s victory chances to 86%. As we reported in January, the market performance in the three months leading up to a Presidential election has displayed an uncanny ability to forecast who will win the White House… the incumbent party or the challenger. Since 1928, there have been 22 Presidential Elections. In 14 of them, the S&P 500 climbed during the three months preceding election day. The incumbent President or party won in 12 of those 14 instances. However, in 7 of the 8 elections where the S&P 500 fell over that three month period, the incumbent party lost. There are only three exceptions to this correlation: 1956, 1968, and 1980. Statistically, the market has an 86.4% success rate in forecasting the election.
As we asked at the start of the year, a “reflexive question emerges: does the market predict the election outcome, or does the move in the market – whether by design or by chance – predetermine the election outcome?”
Frank would rather not take a chance that the answer is the latter, and so said that “what the Fed should do this close to the election is make no waves” adding that “unless there was some totally off-the-charts jobs number, doing something this close to the election I think roils the waters unnecessarily.” Frank was envisioning a “blockbuster jobs report showing the creation of something on the order of 400,000 new jobs” as justifying action “but anything in line with recent job gains would argue in favor of keeping rates level.”
What was shocking about Frank’s statement is not that he expressed what he thought – most political and market watchers know that to be the case – but that he made it so clear that, just as Trump had previously noted, and was promptly called a conspiracy theorist for it, the Fed is aligned against him.
To be sure, even The Hill gets the impact of the lack of a rate hike into the election: “It is generally thought that a rate hike before the election could be risky for Clinton, who is seeking a third term for Democrats in the White House. A rate hike could make it more expensive to borrow money and could slow the economy and cause stocks to fall.”
As such, involving the Fed, an organization that is at least superficially expected to be apolitical, in the presidential race is a shocker. However, since the suggestion came from the left, it will get absolutely not media coverage as usual.
Meanwhile, even Wall Street admits politics should stay out of it and Yellen shouldn’t let political considerations interfere with her decision-making. (she will ):
Jacob Frenkel, the chairman of JP Morgan Chase International and a former Bank of Israel governor, told CNBC Thursday that Yellen would risk politicizing the Fed by waiting until December to hike rates only because of the potential impact on the presidential and congressional races. “I think it will be a mistake to take into account the political process not because it is irrelevant to the economy but because this will actually be the politicization of monetary policy,” he told CNBC’s Steve Liesman while attending the Fed’s Jackson Hole summit.
Other observers think the Fed will wait because board governors are leery of wading into a political controversy. “If you want to take politics into account, you probably want to wait until after the election,” said Axel Merk, the president and chief investment officer of Merk Investments. “Fed officials, especially former ones more than current ones, will tell you that you don’t want to hike just before an election because it’s kind of political,” he added.
It certainly is, and the reality is that both a rate hike or lack thereof would now be perceived as a political move, in the former case it would imply support for Trump; in the latter, the Fed would be accused of aiding Hillary.
Merk added that the Fed “has been looking for every excuse in the book not to raise rates and this may be one of them.”
That may be so, but last night, Citi’s William Lee brought up an interesting point: “in the unlikely event of a surprise Trump win, it is unlikely that a December rate hike would occur, and focus will shift toward easing options.”
Which prompts an interesting question: while it is clear that if the Fed wants Hillary to win, it will not hike in September, the flipside is what if the Fed wants to have justification to begin an easing (oe QEasing) cycle, in the medium-term? In that case, hiking now just to cut and launch more QE, would be precisely the way to do it; and best of all, it will have “president Trump” to blame for unleashing another $4 trillion in wealth transfer from the middle class to the 1%.
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