What will the Federal Reserve do after the 2016 election?

In a move that surprised exactly no one, the Fed’s Federal Open Market Committee met yesterday and announced it would take no action.

The Fed sounded the same note it has been sounding, quite literally for years. Namely, that things are improving at a “moderate” pace, but not strong enough to warrant a rate increase at this time.

According to the FOMC’s press release:

Information received since the Federal Open Market Committee met in September indicates that the labor market has continued to strengthen and growth of economic activity has picked up from the modest pace seen in the first half of this year. Although the unemployment rate is little changed in recent months, job gains have been solid. Household spending has been rising moderately but business fixed investment has remained soft. Inflation has increased somewhat since earlier this year but is still below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation have moved up but remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months…

The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

This press release could have been written years ago, but even if the economy had suddenly taken off since the September FOMC meeting, everyone knew the FOMC would take no action toward raising the target rate in any case. Thus November marked the 94th month in a row during which the Fed’s target interest rate is below one percent:

Given that this meeting was a week before the election, the Fed did not want to be seen as “political” by taking action that could be construed as attempting to influence an election. In spite of these claims by the Fed, there is growing evidence that the Fed favors the incumbent party — as noted by Tommy Behnke  — and Janet Yellen certainly wasn’t going to encourage the FOMC to do anything that might lead to declining markets right before the election. Moreover, given how markets enter into sell-offs every time the Fed hints the time has finally come to raise rates — like they did late last year — the Fed has every reason to believe that any actual rate hike form the FOMC would have sent the markets down.

The FOMC statement justified further inaction by pointing to the fact their inflation measure remains below the arbitrary target of two percent. Even if it had risen above two percent, though, it’s unlikely the Fed would have done anything at all. The first reason for this, of course, is the refusal to take any hawkish action right before an election. But, in addition to this, we also know that Yellen has herself begun to suggest that the FOMC continue to be dovish on inflation even after inflation rises above 2 percent. In the wake of earlier comments to this effect, Yellen launched speculation that she’s begun a “civil war” in the Fed against more hawkish members.

What will be interesting to see is if the Fed suddenly becomes hawkish if Donald Trump wins the election. One suspects that the Fed would continue to proceed with extreme caution in the case of a Clinton win. But, will the Fed be happy to set in motion the next bust, much as it did in 2005 and 2006 when it began to raise the target rate?

This article was initially published on Mises.org.