For the first time in seven years (to the day), the Federal Reserve changed the target federal funds rate, the percentage of interest paid between banks that are borrowing from one another to maintain reserve balances with the Fed. That's the short version of a very long description of how the interest rate overlaps with the economy, but there's a shorter, more clear version still: The interest rate is a key lever the Fed uses to help guide America's economic growth or contraction.
In other words, for the first time since Barack Obama took office, the Fed is moving that lever -- which should change how the economy looks over the medium term. With a presidential election looming, it's worth considering what that means.
The new interest rate is 0.25 percent, an increase from what had essentially been zero. In practical terms, the interest rates of a number of things are likely to increase, which will have effects throughout the economy -- including for you. (The Times made a nice little video explaining all of this.) A rate increase is specifically designed to prevent the economy from growing too quickly, which could lead to inflation. The Fed hasn't raised rates for so long in part because the economy has been so fragile, and it didn't want to slow that growth. The hike now is a sign that the Fed is confident that growth will continue.
If we look back at the history of rate changes, we can see that there are often presidential elections at or near the time of shifts in how the rates are applied. Speaking roughly, the loss of incumbent presidents or their parties occurred in 1992, 2000 and 2008, when rates had hit the bottom point of a series of reductions or were about to start such a stretch. Incumbent parties won in 1996 and 2012 when rates were relatively flat, and in 2004 when rates were just starting to climb.
There are a lot of caveats to that. The first is that we're talking about six elections, not much from which to project outward. But the more important caveat is that the rate changes usually overlapped with recessions. Rates were decreased because the economy was doing badly or starting to do badly -- and that's a much more direct reason for people to want a shift in the White House.
Since 1990, there hasn't been much correlation over the short term between rate changes and presidential approval ratings. Bill Clinton's approval rose in the late 1990s because the economy was doing so well (which was why the rates gradually went up). George W. Bush's approval ratings moved in the opposite direction of rate hikes. Obama's approval has been flat along with the rate hikes, but that's mostly due to polarization.
Hillary Clinton and the Democrats would probably have been very happy for the Fed not to have raised interest rates for another 12 months, ensuring that there isn't even the risk that the economy might slow down. (Bernie Sanders released a statement calling it "bad news for working families.") Slowing the economy at all risks shifting attitudes toward the Obama administration in a way that disadvantages the left next November. And that this is the first such increase since 2006 (and the first change of any kind since 2008) puts us in somewhat uncharted territory.
But there's no need for Clinton to panic or the Republicans to rejoice. The thing about baby steps -- which is what this is -- is that they don't get you very far very fast.