A security guard walks in front of an image of the Federal Reserve following the two-day Federal Open Market Committee (FOMC) policy meeting in Washington, DC, on March 16, 2016.
Kevin Lamarque / Reuters

In the United States, the normalization of interest rates seems inevitable. With the unemployment rate back to its pre-crisis level and inflation slowly moving toward the Federal Reserve’s two percent target, international investors and central bankers expect the rate to move to around three percent from the current 0.5 percent over the next two to three years. Given the body’s high degree of independence, markets assume that Fed Chair Janet Yellen’s decisions will solely rest on macroeconomic data, not on the outcome of the presidential election in November. But history shows that transitions in the White House from Democrats to Republicans are not inconsequential for monetary policy. And a victory by Republican contender Donald Trump would likely confirm the rule.

Janet Yellen is sworn in to testify at her U.S. Senate Banking Committee confirmation hearing in Washington, November 14, 2013.
Janet Yellen is sworn in to testify at her U.S. Senate Banking Committee confirmation hearing in Washington, November 14, 2013.
Jason Reed / Reuters
Independence from the executive branch does not mean that the Fed ignores politics at all costs. And in fact, the body’s political attentiveness might be especially high during a presidential vote, which could bring ideological change and a new policy mix, affecting the economy as a whole and, ultimately, the monetary policy response.

A glance at the evolution of the Fed funds rate, the Reserve’s main interest benchmark, since the 1960s points to a sort of political monetary cycle: When a Democratic presidential term came to an end (whether John F. Kennedy/Lyndon Johnson, Bill Clinton, or Barack Obama) benchmark interest rates were always higher than they were at its beginning. When a Republican was in office (Richard Nixon, Ronald Reagan, George Bush, and George W. Bush), on the other hand, interest rates moved down. In other words, a transition from a Democratic to a Republican presidential era was always associated with a long cycle of monetary loosening, whereas when a Democrat took power, monetary policy tightened (rates fluctuate quite substantially between the beginning and the end of a presidential term).

Edoardo Campanella
The least plausible explanation for such odd macroeconomic regularity is that the Fed acts strategically to benefit the party that first appointed its chairman, meaning that it cuts rates to stimulate investment and revive a slowing economy. It is true that three of Yellen’s four predecessors (Arthur Burns, Alan Greenspan, and Ben Bernanke) were appointed by Republicans. And it is well documented that in 1972, Nixon pressured Burns to secure his reelection by injecting money into the economy through a rate cut. Only Paul Volcker was appointed by a Democrat (Carter) and his strong commitment to fight stagflation did not prevent him from raising interest rates by more than seven percentage points in less than a year when Carter was still in power.

Yet it is hard to reconcile the partisanship argument with the fact that presidents coming from the opposite party subsequently confirmed all Fed chairs. This is to say nothing about the high degree of transparency of the Fed’s decision-making process in honoring its dual mandate of price stability and full employment.

What’s more likely, instead, is that overall macroeconomic conditions, and not political biases, dictated the Fed’s decisions. It is not random that the long cycles of monetary easing start when a Republican president takes office. They coincide with the outbreaks of recessions, which since Nixon have always materialized within the first 18 months of a Republican presidency. And so the Fed was more likely to cut rates to revive the economy when a Republican was in power.

Luck—good for the Democrats and bad for the Republicans—and inheritance have played a role.
Princeton University professors Alan Blinder and Mark Watson have found that, for a sample starting in 1949, of 49 recession quarters, only eight were under Democrats and 41 were under Republicans. It is hard to assign blame; some, including James Campbell of the University of Buffalo, have argued that recessions happening in the first months of Republican presidencies were a legacy of the Democratic predecessors.

But by most macroeconomic metrics, Democratic presidents have outperformed their Republican counterparts over the last 70 years. Annual GDP growth has been close to 4.5 percent during Democratic administrations, compared to 2.5 percent under Republicans. That figure, too, could be the result of groundwork laid under previous administrations. But even by shorter-term indicators, Democratic administrations over-performed. Returns on the S&P 500, for example, have been markedly higher under Democrats: 8.4 percent versus 2.7 percent. Moreover, at the end of a presidential term the unemployment rate has historically been about 1.5 percentage points higher when a Republican sits in the Oval Office, and the structural budget deficit tends to be, on average, 0.7 percentage points lower under a Democratic president.

Policies explain part of the gap. Clinton, for example, undertook a major budget readjustment process to restore the health of public finances after a long Republican era that was characterized by low taxes, increased military spending, and large budget deficits. At the same time, Nixon’s highly inflationary policies contributed to the collapse of the Bretton Woods system.

But, to be fair, luck—good for the Democrats and bad for the Republicans—and inheritance have played a role. Johnson’s belated attempts to stem inflation handed Nixon a recession; high unemployment and inflation in the Carter era led to a downturn in the Reagan years. And a few months after having being sworn in, George W. Bush had to deal with the dot-com bubble burst and the 9/11 attacks. In addition, Republican presidents generally took office when the business cycle was already mature. The second Bush became president after almost ten consecutive years of economic expansion; Nixon came after about eight.

United States one dollar bills are seen on a light table at the Bureau of Engraving and Printing in Washington.
United States one dollar bills are seen on a light table at the Bureau of Engraving and Printing in Washington.
Gary Cameron / Reuters


Predicting whether a recession is more likely under Clinton or Trump, and so whether monetary policy might take an unexpected turn, is pure speculation. Both leaders would inherit an economy that has been expanding for about eight consecutive years, and at a time of major global macroeconomic and political uncertainty. Therefore, luck and inherited conditions would affect their economic stewardship in the same way.

However, the policies Trump proposes, ranging from breaking trade deals to an unsustainable tax plan, make a crash under his leadership more probable. Today’s already high policy uncertainty would be exacerbated and the global recovery would be at risk. Former Treasury Secretary Lawrence Summers goes as far as to predict that a protracted recession would break out within 18 months of Trump’s investiture.

But should this scenario become a reality, it would simply tread the well-established recessionary path that has so far characterized any modern transition from a Democratic to a Republican president, with Trump’s polarizing personality just making markets more nervous and the contraction more painful. Inevitably, and defying current expectations of further monetary tightening, the Fed would be forced to act accordingly.

You are reading a free article.

Subscribe to Foreign Affairs to get unlimited access.

  • Paywall-free reading of new articles and a century of archives
  • Unlock access to iOS/Android apps to save editions for offline reading
  • Six issues a year in print, online, and audio editions
Subscribe Now