If you are in any way involved in investments or a student of economics, you know that monetary policy is a hot topic.
Within the debate about what to do about the money supply, or how to manipulate interest rates, or regulation, or a plethora of other issues, is one issue that economists, as a group, ardently defend. The issue is central bank independence.
Essentially, economists argue that it is best for the individuals in charge of the money supply to be independent of political influence.
This view is under fire in the U.S., Europe, and other areas of the globe.
In particular, the renewed interest is generally not about whether central bankers should be independent of political influence, the debate now is whether they actually are independent.
Here is a brief look at the U.S. experience.
Federal Funds Rate by President
First, here is a look at the federal funds rate. In red are instances of rate hikes. Since the early 1980s, there have been 77 rate hikes.
Here is a look at the same data broken down by president.
In looking at the raw figures, it is difficult to see any bias or trend.
The rates generally rose through the 1970s and into the early 1980s (the high inflation years).
Since the high inflation years, the federal funds rate has generally been lower.
Without doing any statistics, it looks difficult to make a conclusion on whether centralbankers play politics with interest rates, at least in the U.S. Perhaps a different view will change this presumption.
Rates went through two tightening cycles during the Eisenhower Administration (Republican), one short tightening drift during the Kennedy Administration (Democrat), two brief tightening cycles during the Johnson Administration (Democrat), one quick tightening cycle during the Nixon Administration (Republican), none during the Ford Administration (Republican), strong rate hikes during the Carter Administration (Democrat), a couple of rate hikes during the Reagan Administration (Republican), a very small rate hike during the Bush I Administration (Republican), a couple of rate tightening cycles during the Clinton Administration (Democrat), one tightening cycle during the Bush II Administration, and no tightening instances during the Obama Administration (Democrat).
Federal Funds Rate by Party
Another view of the same data follow. This view plots the federal funds rate by party.
Interestingly, this perhaps shows a bias or preference for Democratic presidents in that rates are more volatile during Republican Administrations, and it appears that there is a higher likelihood of a rate hike during a Republican Administration.
Further research is needed.
Fascinatingly, these two views do not present a central bank independent of political preference.
The first graphic - median federal funds rate by party, shows that the federal funds rate is typically higher during Republican Administrations than Democratic Administrations.
The next figure looks at the number of formal rate hikes by party.
This view shows an even bigger bias for Democrats over Republicans, by a 59 to 18 margin.
These two views certainly do not provide any confidence that central bankers in the U.S. are simply trying to keep the economy going. There might be something more to the story.
Upon more detailed inspection, the politically independent view appears to be somewhat sketchy, at least when looking at the median federal funds rate and the number of rate hikes by party.
Both measures show a strong preference for Democrats over Republicans.
Perhaps there are explanations, although, it is hard to explain such gigantic differences.
Individuals pointing out the interconnectedness between monetary policy and politics are probably on to something.
