Federal Reserve: Election-year hikes and long-end rates risks – TD Securities

TD Securities strategists argue that Federal Reserve (Fed) decisions in election years remain driven by data rather than politics, with only a small difference in action frequencies versus non-election years. They warn that avoiding a hike for political reasons could push long-end rates and inflation swaps higher, particularly if markets move toward pricing in nearly a full hike by the October meeting while the Fed remains on hold.

Election-year Fed moves and markets

"Election years tend to not be correlated with more or less Fed actions, as the Fed remains data-dependent."

"In the meeting closest to Election Day, 70% of meetings resulted in a hold, while 30% resulted in either a hike or cut."

"Choosing not to hike due to political concerns over the midterms would likely actually push long-end rates and inflation swaps higher if the Fed is viewed as political and unwilling to raise rates to tackle inflation."

"If markets continue to price in nearly a full hike by the October meeting without further guidance and the Fed continues to hold, investors could be led to believe a Fed hold was political if Warsh does not provide an adequate explanation in the presser."

"As the Fed remains data-dependent, if we start to see surprises drift positively, this could lead to a market that is concerned around labor market reacceleration."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)