Midterm elections

Posted by Scriptaty | 5:38 AM

Perhaps its no coincidence the biggest impact on the dollar usually comes during the second year of a presidential term when midterm elections are held.

Congressional midterm elections never seem to have the panache associated with presidential elections.

Instead of being about big themes and overarching policies, they are usually centered on “pocketbook” issues that affect the immediate economic welfare of voters. Inevitably, focus shifts to those institutions that are seen as capable of shaping the economy — namely the Federal Reserve.

There is a great deal of uncertainty about the course of Fed policy ahead of this November’s midterm election.

Although the Fed refrained from hiking rates in August (for the first time since June 2004), the market is not convinced the tightening cycle is over.

However, if history is any indication, the Fed may hold off until after the Nov. 7 elections.

Although the Fed retains its independence, since 1972 it has either maintained a neutral policy (four times) or cut rates (three times) prior to midterm elections. 1978 was the only time the Fed, trying to fend off the destabilizing effects of rising inflationary pressures, hiked the discount rate by 100 basis points just days before the midterm election. In the midst of a tightening cycle that increased interest rates 175 basis points in 1994, the Fed chose to pause immediately before the Nov. 8 election, only to hike rates 75 basis points days after the election.