Scroll social media for more than a few minutes and you’re sure to see politically charged posts about gas prices, inflation, and interest rates. But does the President have any real control over those issues? Let’s address some myths.

Interest Rates and the Federal Reserve

Contrary to popular belief, Presidents have almost no impact on interest rates other than appointing members to the Federal Reserve. Member terms are staggered in 14-year increments and don’t follow political cycles. Appointees also require Congressional approval. There are twelve voting members, each of whom has minimal impact on any single decision. There are no documented instances in which a Federal Reserve decision was impacted by political prejudice. An argument could be made that Fed Chair Author Burns made some questionable decisions in the early 1970s that may have been due to his friendship with Richard Nixon. Still, the other voting members, many of whom were not politically aligned with Nixon, also agreed to the policy decisions.

Interest rate changes are implemented by twelve decision-makers, but their decisions are driven by conditions in the broad economy. The independence of the Federal Reserve is key to sound economic policy and should remain free from political influence. That’s not to say that interest rates and monetary policy don’t have an impact on politics, but historically there aren’t examples in which the independent voting members of the Federal Reserve conspired to influence a political outcome.

Recent interest rate increases, for instance, were done in response to inflationary pressures that stemmed from COVID. The decision to raise rates in 2022 had nothing to do with the presidential party in office and everything to do with concerns about inflation. Likewise, whether interest rates decline in September or November will be driven by economic data, rather than political affiliation. For the record, rate cuts have been so telegraphed leading up to this point that it shouldn’t move the needle politically one way or the other. Regardless of who wins in November, interest rates are heading lower so long as inflation remains subdued. That brings us to our next topic: inflation.

Inflation

Inflation occurs for one of two reasons: (1) the shortage of a resource or (2) an abundance of money.

Take the inflation issues of the 1970s. Inflation began to rise in 1966 during the Lyndon Johnson term and continued to rise under the next three Presidents: Nixon, Ford, and Carter. The inflation issue wasn’t isolated to a political party, rather, the money supply in our country grew by 42% during the 1960s and then by 78% in the 1970s (a dramatic rise compared with previous decades). The additional money injected into the economy led to rising prices.

In many cases, inflation issues can be traced back to poor monetary policy decisions by the Federal Reserve (they do make mistakes) and excessive government spending (which falls more on Congress than the President).

The recent inflation we experienced in 2021-2022 was directly related to an abundance of economic stimulus coupled with a constrained supply chain; creating a shortage of nearly everything. While President Trump signed the $2.2 trillion CARES Act in March 2020, he shouldn’t be blamed for the inflation that followed. Nor should President Biden who signed a $1.9 trillion stimulus bill following his election. In both cases, the bills passed through Congress before being signed by the President. The passage of each act had little to do with the political party in office and everything to do with supporting the economy during COVID. Furthermore, some level of stimulus was undoubtedly needed to help the economy avoid a deep recession.

The Russia / Ukraine war further constrained supply chains and created shortages of oil and gas, leading to higher prices at the pump and ultimately higher prices of everyday goods in America. That leads us to our next topic: gas prices.

Gas Prices

Oil is a global commodity, produced primarily in foreign countries. The price of oil is driven by usage and demand. Oil prices rise when demand increases from an uptick in global travel and declines during global recessions when demand is low. Prices may rise when hurricanes impact supply, or when oil-producing countries reduce production. Oil prices offer a pretty good example of the classic supply v demand chart pictured below. Nowhere does the President factor in.

Under President Obama, gas prices (Source: AAA) fell from a high of $3.95/gal in 2013 to a low of $1.43/gal in 2016. They rose again during President Trump’s term to $2.87/gal in October of 2018 before falling to $1.40/gal due to COIVD in April of 2020. The fact that gas prices fell during Obama’s term and rose during the first two years of Trump’s term had nothing to do with the political policies of either party. When gas prices hit $1.40 in April 2020, it was also about the collapsing global demand and not political policies.

Presidential Impact on the Broad Economy

So, if Presidents don’t impact interest rates, inflation, or oil prices, what impact do Presidents have on the US economy? Not as much as they get credit (or blame) for. Presidents may indirectly set the tone for the economy by voicing pro-business policies or addressing desired policy changes in speeches. The President can also shape the agendas of regulatory agencies such as the Federal Trade Commission but the president alone can’t determine tax policy without the cooperation of Congress. Most of the direct presidential impact on the economy is isolated to global trade with foreign countries. The President can negotiate trade agreements and impose tariffs (up to a certain point) without further congressional action.

When the same political party controls the executive and congressional branches of government, policy is obviously more likely to move in one direction. But presidential influence is limited beyond that. The outcome of the presidential election is just one input in a very complex web of free markets, consumer confidence, foreign leaders, geopolitical events, and changing population demographics that all play a role in shaping the nation’s economy.

Elections do matter, they just aren’t as important for the economy as many would have you believe. Regardless of the outcome in November, consumers will continue to shop, travel and spend. Businesses will continue to advertise and innovate. Both political parties have a history of recessions and economic expansions. Historical stock market returns are nearly identical under each party. The outcome in November may be exciting or upsetting for many reasons, but don’t let it be a leading factor in your investment decisions. The economy will be fine…or it won’t be. But either way, it isn’t likely due to the result of who wins in November.

There are many feasible scenarios for the path of the economy over the next four years. We continue to believe that diversification and risk management are the keys to success. We sincerely appreciate your continued trust and confidence as we help you navigate the changing environment.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Raanes & Oliver Capital Advisors and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected.