July 27, 2016 / 6:35 PM / 3 years ago

U.S. election risks could push Fed rate hikes further out

NEW YORK (Reuters) - The Federal Reserve has bowed to political risks once already this year, deferring a possible interest rate hike in part due to Britain’s European Union vote, and it may do so again as November’s U.S. presidential election looms.

The Federal Reserve Building stands in Washington April 3, 2012. REUTERS/Joshua Roberts/File Photo

While both Republicans and Democrats have criticized the Fed, Donald Trump’s policies are likely to be more disruptive to the U.S. economy and financial markets with his threat to upend decades of consensus on free trade, his discussions of whether to renegotiate U.S. debt, and his ambitious tax-cut plans that many independent analysts say would add dramatically to federal debt.

“There are a lot of uncertainties that are in the economy. One of those is the upcoming elections,” Philadelphia Fed President Patrick Harker told reporters this month.

When they first lifted rates from near zero in December, Fed officials predicted four more moves through 2016. But after months of delays and repeated acknowledgements that the economy was underperforming, Fed Chair Janet Yellen and her colleagues stood pat again on Wednesday, as expected.

Fed policymakers said on Wednesday near-term risks to the economy had diminished and their latest forecasts, from June, see roughly two hikes this year with three policy meetings scheduled to the end of 2016.

But with a November move seen as highly unlikely, given that the central bank’s meeting that month comes just a week before the presidential election, economists say the Fed could be rushed into hiking in September or, more likely, wait until December.

While the Fed has raised rates ahead of past elections, its options are dwindling. Economists and Fed policymakers have increasingly warned that the already bitter election could freeze Fed policy if campaign polls and rhetoric begin to rattle investors, consumers or employers.

“The election is a straight-up risk event with a defined date, much like Brexit, so the cautious view is to anticipate some gyrations in markets,” said Shehriyar Antia, a former senior analyst at the New York Fed who later founded Macro Insight Group.

“Their inclination is going to be to wait until the dust settles on that storm before taking some policy action.”

At its meeting a week before the UK referendum last month, the Fed predicted less aggressive policy tightening in the years ahead. A Reuters poll of 100 economists published last week found that December is the most likely time for a hike.

Morgan Stanley economists wrote both U.S. presidential candidates have policies that could alter fiscal stimulus, trade policy and tax reform, and that “would alter the underpinnings of the U.S. economic outlook as well for equity, rates, FX, muni, housing, and corporate markets.”

They noted that unwinding free trade would have a “meaningful” impact on the economy.

Trump clinched the Republican Party’s nomination in part on an anti-free trade platform. And while Hillary Clinton, his Democratic challenger who slipped behind Trump in the latest Reuters/Ipsos poll, is seen as more closely representing the status quo, she too has backed away from free trade.

Fed officials have taken notice.

Harker cited a recent rise in the Philadelphia Fed’s “partisan conflict” index, which measures disagreement among parties, Congress and the White House. In the past this has signaled increased uncertainty among firms and households.

Consumer spending accounts for more than two-thirds of U.S. economic activity and it has been robust, as payrolls have posted strong monthly growth and wages have continued to edge higher.

Still, business spending has been soft. Data on Wednesday showed new orders for U.S. manufactured capital goods rose only modestly in June after sliding in May, while shipments of these goods declined.

“People will maybe hold off on hiring and investments until that uncertainty resolves itself,” Harker said.

Reporting by Jonathan Spicer; Additional reporting by Ann Saphir in San Francisco; Editing by Andrea Ricci

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