More economists than not think Federal Reserve officials will raise interest rates at their meeting next month. The rate has hovered near zero since December 2008 and it would be the first increase since June 2006. Interest rates and the country’s monetary policy were a heated part of the discussion at the recent Republican debate, for good reason.
The Fed’s power to influence the economy is largely unmatched. Its rates determine how much I will pay for my next loan and may determine when or if I decide to borrow. Its decisions can avoid recessions and cause them. As appraiser Jim Kelley wrote in his column last week, the Fed can also determine whether housing is attainable for the middle class.
In Flathead County since 2009, housing prices have largely matched up with what is considered affordable based on local wages. But as interest rates rise, as they inevitably will, the cost of paying back a loan will also increase.
“Mortgage interest rates are a key player in what is affordable and they have been at near record lows of around 4 percent over the last four years,” Kelley wrote. “If and when those rates start to increase, they will drive down home affordability and could slow the housing market.”
There are few agencies (perhaps the IRS and EPA) that are targeted more by politicians than the Fed, especially on the right. The modern Tea Party largely galvanized support following two major financial decisions approved by the federal government. Former Republican President George W. Bush implemented the Troubled Assets Relief Program in 2008, which bailed out large banks; and Democratic President Barack Obama passed the American Recovery and Reinvestment Act (or stimulus) in 2009.
Since then, criticizing the country’s financial policies is commonplace, and specifically those of the Federal Reserve, an agency that makes autonomous decisions but nonetheless can sway elections.
This is especially true in regard to interest rates, which often rise when the Fed thinks the economy is strengthening, or to battle inflation, or both. Right now, inflation is low, but the Fed thinks the economy is healthy enough to raise rates to more normal levels. If history is any indication, the effectiveness of its rate change could influence the presidency.
The Federal Reserve raised interest rates to battle inflation in 1979, which preceded a recession, and which is partially attributed to Ronald Reagan beating Jimmy Carter in a landslide in 1980. In 1992, with the country just emerging from a another recession, George H.W. Bush argued that then Fed Chair Alan Greenspan (who Bush had appointed) failed to aggressively cut interest rates fast enough to boost the economy. He lost to Bill Clinton.
Yes, interest rates determined by the Fed could impact a number of political candidates in 2016, and those candidates can’t do much about it.
Some Republican presidential hopefuls at the recent Fox Business Channel debate said the Fed Reserve (and the federal government in general) is doing too much to prop up the economy. Ohio Gov. John Kasich, who worked at Lehman Brothers in the run-up to the financial crisis, was booed after he suggested that he would prop up failing banks to protect customers’ deposits.
The Fed is a quintessential part of the establishment, which no candidate (on the left or right) wants to be perceived as a part of. Regardless of its decisions’ outcomes over the next few months, expect the Fed bashing to continue.
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