Keep Politics Out Of The Federal Reserve
President Trump is trying to politicize monetary policy. He should be resisted on this front.
Steve Rattner, a Wall Street trader and analyst who served as President Obama’s adviser during the effort to bail out the American auto industry during the first term of Obama’s Administration warns against allowing President Trump to politicize the Federal Reserve Board:
Once again, the Federal Reserve has regrettably become a favorite whipping boy.
President Trump has been lobbying it to lower interest rates, even though the unemployment rate is 3.8 percent. Progressives are still complaining that the central bank didn’t do enough to stimulate the economy in the wake of the 2008 recession.
More worrisome, Mr. Trump has been attacking the Fed’s actions with more vitriol than any previous president in memory while proposing two highly partisan and unqualified nominees to join a distinguished board that has historically been free of any political agenda.
The policy critics on both sides are about as wrong as imaginable. And above all, we need to guard the independence of the central bank, the most important government institution that has not been divided by the deep partisanship so evident elsewhere.
In an era when even the Supreme Court divides routinely along ideological lines, the Fed still maintains an analytical and, as the former chairman Janet Yellen liked to say, data dependent approach to policymaking.
As Rattner goes on to note, there have been times in the past when there has been conflict of sorts between the Federal Reserve and the political branches of government. One of the most notable examples of this in recent memory. of course, came during the time in the late 1970s and early 1980s when the Board, led by Paul Volcker, put an increasingly tight rein around monetary policy in an effort to combat the combination of inflation and a stagnant economy that the United States experienced throughout the 1970s and particularly in the late 70s under President Carter. Those policies, which included a radical tightening of monetary policy and other moves, eventually pulled the economy into a deep recession early in President Reagan’s first term that eventually required him to scale back the extent of spending projects and his signature tax reforms in order to accommodate the state of the economy at the time.
Fortunately for the country. both Reagan and President Carter. who initially appointed Volcker to his position as Chairman of the Federal Reserve Board, kept any criticism of Volcker out of the public eye and allowed him to do his job. As a result, the inflation monster was finally killed in the early 1980s and the economy proceeded to enter a very substantial recovery because of that. Eventually, Reagan reappointed Volcker to a second term which he served before being replaced by Alan Greenspan, who was also permitted by the Presidents he served under to run a politics-free Federal Reserve. Additionally, subsequent Presidents followed the example of Carter and Reagan and allowed the Fed to pursue its mission with little political interference.
As Rattner notes, that has changed under President Trump:
Happily, the Senate has already made clear that Herman Cain — with little relevant experience and charges of sexual harassment swirling around him — would have been unlikely to survive confirmation. (Mr. Cain withdrew his name from consideration.) And Stephen Moore, with a raft of tax peccadilloes, would also have to explain past statements like “I’m not an expert on monetary policy.”
Mr. Trump and his aides base their call for the Fed to lower rates on quiescent inflation, a phenomenon that could well be either aberrational or a new normal. Put me down as generally skeptical of pronouncements of a new normal.
And having come of age as a young Times reporter covering economic policy during a period of rampant inflation, I’m particularly skeptical of declaring inflation dead and buried.
Regardless, few mainstream economists believe that the interest rate increases to date have impeded the recovery, nor would cutting them materially accelerate growth.
“The president is using the Fed as a scapegoat for his own economic policy mistakes,” Mark Zandi, the chief economist of Moody’s Analytics, told me. “The Fed’s actions last year have no bearing on long-term economic growth.”
Mr. Trump’s saber rattling has unnerved international allies. A week ago, the European Central Bank’s president, Mario Draghi, said that he was “certainly worried about central bank independence,” especially “in the most important jurisdiction in the world.”
We should all be worried. And most important, Mr. Trump should keep his hands off the Fed.
To some degree, Trump’s criticism of the Federal Reserve can be seen has having sprung from a general antipathy toward the Federal Reserve Board that has developed among conservatives over the past decade or so. To no small degree, that antipathy started at least in part with the Presidential candidacy of former Congressman Ron Paul who spent the better part of his later years in Congress, and his Presidential campaigns in 2008 and 2012. calling for an “audit” of the Federal Reserve by Congress that seemed designed more than anything to be oriented toward increasing the amount of political control over Fed policy if not eliminating the Federal Reserve altogether and returning the nation to the gold standard, a position that has been popular among some conservatives and libertarians for years while others, such as myself, tended to favor the pro-Fed position taken by people such as the late Milton Friedman, who advocated for changes to Fed policy but generally accepted the idea that it is an institution that has done more good than harm notwithstanding the fact that mistakes on its part clearly contributed to the Great Depression of the 1930s and the Great Recession of the latter part of the first decade of the 2000s.
In any case, Trump’s position seems to be animated by both this wing of conservative economic thought and by his general belief that the institutions in Washington that have traditionally been outside politics — such as the Supreme Court, the intelligence agencies, the F.B.I., and the Department of Justice should primarily be loyal to him and carry out his will and his policies. For obvious reasons, this is a particularly dangerous position to put the Federal Reserve in given the fact that changes in monetary policy motivated by politics rather than economic data and expertise has the potential to impact the economy not only of the United States but the rest of the world as well. For this reason alone, Congress should act to make sure that the President keeps politics out of the Fed, Effectively blocking Herman Cain’s nomination was a good start, but it is unlikely to be the last we hear from the President when it comes to monetary policy.