Just One Of Those Do-Nothing Election Years? Not Likely

Usually, not much gets done in Presidential election years: Politicians are too busy positioning themselves ahead of the contest, while Federal Reserve policymakers prefer to stay out of the limelight. But Washington could spring a few surprises in 2004.

This year, political considerations could drive action on a number of fronts. Chairman Alan Greenspan's Federal Reserve could nudge up interest rates at midyear, and lawmakers could pass a parcel of important legislation, including mutual-fund reform and tax cuts aimed at increasing savings.

The central bank has two windows for hiking interest rates: summer 2004, before the election campaign really heats up, or winter 2005, says Laurence H. Meyer, a former Federal Reserve governor who is now with the Center for Strategic & International Studies. If the economy continues to outperform expectations and inflation ticks up, the Fed could tighten at its June or August meetings. But if it hasn't acted by then, it will put off an increase until 2005, well after the election.

Pre-election politics will also shape the tax-cut package that President George W. Bush is expected to roll out. Modeled on a proposal he first made in early 2003, it's likely to call for the creation of new kinds of savings accounts: Savers would have to deposit aftertax dollars, but interest, capital gains, and dividend income earned on them would never be taxed, and the funds could be withdrawn for any purpose. In deference to fiscal conservatives who have criticized the President for the swelling budget deficit, the package will probably be less generous than the 2003 proposal, which would have allowed savers to stash $7,500 a year in such accounts. Chances for passage look good, because Democrats would find it difficult to oppose such a plan in an election year.

With scandal rippling through the mutual-fund industry, Congress is also likely to pass mutual-fund reform legislation in 2004. Already, the House has overwhelmingly approved a bill aimed at improving fee disclosure, beefing up the independence of fund boards, and deterring trading abuses. The version that the Senate will take up early in 2004 is likely to be tougher. The bottom line for investors: added costs, at least initially, as funds scramble to meet the new requirements. But in the long run, the reforms could lead to more competition and lower costs as investors use the extra information to shop around and independent directors demand more from fund managers.

Watch Washington closely next year. What comes out of the nation's capital could have dramatic implications for investors for years to come.

By Rich Miller

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