Fed has become so politicized that it will not hike rates before the election - BBH

Research Team at BBH, notes that some observers argue that the Fed has become so politicized that it will not hike rates before the election and this is not a strong argument on a number of counts. 

Key Quotes

“First, the US Senate has left the Board of Governors understaffed.  It has refused to confirm Obama nominee to fill two vacant seats.  Second, the structure of the Federal Reserve includes staggered terms, with the chair’s not concurring with the President's. This allows for a great degree of independence, especially after the 1951 agreement with the US Treasury. 

Third, and most importantly, a rate hike in the current context is a vote of confidence in the US economy.  It is not clear what monetary policy the Obama Administration or Clinton (or Trump for that matter) desire.  Increasing the Fed's target range for Fed funds from 25-50 bp to 50-75 bp will likely have little impact on most Americans.  Last December's rate hike, similarly had little perceptible impact.  It did not stop mortgage rates from easing.  It did not lead to higher unemployment.  It did not sap consumption. 

Lastly, we note that the backing up in interest rates and market-based measures of inflation expectations were in part driven by the rally in oil prices.  A two-week drop was ended by two considerations.  First, there is some defensive positioning taking place amid a steady, although not contradictory, news stream playing up the possibility of an agreement to limit future oil output.”