The Fed says it ignores politics. Its rate moves tell a more complicated story

Federal Reserve officials agree that inflation needs to return to the central bank’s 2% annual target. Instead, the war with Iran has sent gas prices soaring, and price increases are starting to spread beyond the gas station. Last month, that prompted Fed officials to raise rates for the first time in three years to cool the economy and bring down inflation.

Yet this month, even with the inflation picture worsening, the Fed is widely expected to hold rates steady at its Wednesday meeting.

Would that still be the case if the midterms weren’t just six days away?

At his 2:30 p.m. press conference Wednesday, Fed Chairman Kevin Warsh is likely to face questions about political pressure if the central bank does keep rates unchanged. The Fed’s independence is a cornerstone of its monetary policy decisions. However, in an election year, that independence inevitably comes under the microscope.

Outside of the pandemic, when rates were kept at near-zero levels, the Fed adjusted rates within two months of Election Day in four out of five of the most recent election years.

In September 2024, for example, the Fed slashed its benchmark interest rate by half a point just six weeks before the presidential election. That marked the start of a cutting cycle as inflation cooled and officials grew concerned about a weakening labor market.

Meanwhile, leading into the 2022 elections, the central bank pushed out two consecutive three-quarter point hikes, triple the size of the typical rate move, as it battled the worst inflation in almost four decades. And at the meeting after Election Day it announced another hike, this time a smaller half point.

In 2016, officials didn’t change rates at the two immediate meetings before Election Day and instead hiked rates by a quarter point at the subsequent meeting.

At that time, then-Philadelphia Fed President Patrick Harker supported a rate hike in September. However, he said he was opposed to hiking at the November meeting that was just six days before the presidential election.

“What I’m worried about is depending on the outcome of the election and what happens after that, if there are policies that would have distortive effects that we would have to respond to, we’ll have to respond,” Harker said in remarks in October 2016. “And I don’t know which way that will go. But it may be prudent to wait until we have resolved some of that uncertainty.”

Then-Fed Chair Janet Yellen, though, said the election did not play any role in officials’ decision-making process.

Leading up to this week’s meeting, Fed officials have signaled that they believe economic conditions don’t warrant another immediate hike and that they would rather wait for more data. That’s because raising rates too early could unnecessarily weaken the economy — for example, by prompting consumers to pull back on spending as borrowing costs rise.

That measured approach contrasts with President Donald Trump’s demands for lower rates.

Elected officials, particularly presidents, tend to favor lower interest rates because that makes it cheaper for consumers and businesses to borrow. Trump, whose support has been faltering in recent months as gas prices and other costs have risen, has increased his pressure on the Fed to lower rates.

Trump tapped Warsh to succeed Fed Chair Jerome Powell after repeatedly criticizing the central bank for not aggressively cutting rates. But Warsh’s first major move as head of the central bank was a rate hike, a decision that many viewed as a sign he wasn’t going to let politics interfere with Fed policy.

Nonetheless, if the Fed does hold rates steady as expected, Warsh may have to work harder than usual to convince Americans that the political calendar played no part in its decision. (While the Fed chair has considerable power at the Fed, the position represents just one vote on a 12-person committee.)

“Tightening cannot appear to be a move against the administration, while holding cannot look like accommodation,” EY-Parthenon chief economist Gregory Daco said in a note last week.

Meanwhile, Bank of America head of US economic research Aditya Bhave noted that since investors expect the Fed to hold rates steady, a hike could now catch markets off guard and trigger further volatility at an already tense time.