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Oliverstonitis
Most people are not infected with fondness for conspiracy theory. However, the most widely heard New Year's prediction from people about to borrow money goes like this: "Interest rates have to go down -- it's an election year."
It's tempting to assume that politicians will arrange low interest rates in order to assure their re-election. Sometimes borrowers refer to the President, sometimes to the Congress (either party); often to the markets, and the Fed is always included in the theory.
In reality, the Fed takes orders from no one. Constant pressure from politicians meets automatic stonewall. While the Fed will do what it can to dovetail with a President's economic policies, ultimately the Fed will do what it thinks is right.
As an election approaches, the Fed will try to keep a low profile -- invisible, if possible -- to avoid the appearance of favoritism or influence over the outcome. It might defer needed action from October until December, for example, but window dressing the economy is unthinkable.
Perhaps the historical record will aid the unconvinced.
1972. Mortgage rates began the year at 7.44%, fell to an April low at 7.29%, and rose back to 7.43% by election day. The Nixon landslide neither needed nor got help, here.
1976. Mortgage rates fell from a January high of 9.02% to 8.76% in May, and climbed back to 8.81% in November. The markets didn't finish Gerry Ford: unpardonable dullness did him in.
1980. The market gave Mr. Carter the coup de grace twice in one year: January's 12.88% rocketed to 16.32% in April, fell to 12.19% by July, and rebounded to 14.21% in November. Overkill.
1984. January's 13.37% gave way to 14.67% in July, but Mr. Mondale's demise was not explained by November's 13.64%.
1988. 10.38% in January improved to 9.93% in March; but the rise to 10.61% in November was not enough to save Michael Dukakis. Nothing was.
1992. 8.43% in January, a high of 8.94% in March, and a low of 8.31% in November. The best mortgage rates in 20 years weren't enough to save George Bush; not even Bill Clinton could do that.
If you can find a pattern of manipulated rates in this history, you belong in the movie business.
However, if you would like a real conspiracy theory, note that recessions "happen" only in non-Presidential election years: 1973-74, 1981-82, and 1990-91. The Fed tries to play it straight in election years, but its governors are not crazy.
While rejecting the consensus prediction for the 1996 election year, I hear a catcall from the back of the room demanding an alternate forecast. Fair enough.
The Fed is almost certain to continue to lower short term interest rates, the only ones it controls. The Fed funds rate, lowered two weeks ago by .25% to 5.50%, is likely to be 4.00-4.50% a year from now. The "prime" rate, and rates for cars, credit cards, home equity lines of credit, and so on will dutifully follow, down.
The outcome for mortgage rates and bond yields will be perverse. Long term rates improve in a weakening economy, which limits inflation and the demand for credit. When the Fed reduces short term rates, it intends to strengthen the economy, and will likely succeed. The Fed may ease all year long, yet leave mortgage rates wandering just about where they are.
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