That Precious Fed Independence

Well, what do you know? That precious Federal Reserve independence we keep hearing about turns out to be a crock.

That reality was exposed in the most blatant terms last week when William Dudley, just a year removed from his serving as the president of the Federal Reserve Bank of New York – the second most powerful position on the Fed, just below the chair – argued in a Bloomberg op-ed that the current Fed should do absolutely nothing to try to fix the economy if President Trump is hell-bent on destroying it through his tariff war with China. The Fed, he said, shouldn’t “bail out an administration that keeps making bad choices on trade policy, making it abundantly clear that Trump will own the consequences of his actions.”

But he went well beyond that, urging the Fed to use its monetary policy to help defeat Trump in the 2020 president election.

“There’s even an argument that the election itself falls within the Fed’s purview,” he said. “After all, Trump’s reelection arguably presents a threat to the U.S. and global economy, to the Fed’s independence and its ability to achieve its employment and inflation objectives. If the goal of monetary policy is to achieve the best long-term economic outcome, then Fed officials should consider how their decisions will affect the political outcome in 2020.”

Thank you, Mr. Dudley, for that admission. Some of us have suspected, and stated as much, that members of the Fed do let their own political leanings dictate their policy decisions over economic considerations. But no, we are told, the members of the Fed are only concerned about meeting their dual mandate of moderate price inflation and full employment without regard to their own personal politics – like journalists, who never, ever, let their own political beliefs get in the way of their reportage.

I’m not suggesting that Mr. Dudley speaks for anyone on the current Fed – most of whom he served with up until last year – or for anyone he served with when he was on the Fed. Maybe many or even most of them really do manage to keep their politics out of the meeting room when they meet to discuss and make monetary policy. For its part, the Fed dutifully distanced itself from Dudley’s remarks. “The Federal Reserve’s policy decisions are guided solely by its congressional mandate to maintain price stability and maximum employment. Political considerations play absolutely no role,” a spokeswoman said. But it sure makes you wonder.

It would have been nice if Dudley had discussed how his own politics might have played a role when he was on the Fed (surprise, he didn’t). I seem to remember that the Fed, then chaired by Janet Yellen, deliberately kept interest rates at or near zero and spent trillions of dollars trying to corner the market on Treasury and mortgage securities for practically the duration of President Obama’s two terms. Now, did they do that in order to try to keep a moribund economy afloat, or did they do that in order to help Obama politically by trying to paper over the failure of his antigrowth economic policies? Given Dudley’s sudden burst of honesty, some cynics could be forgiven for thinking it was the latter.

As head of the New York Fed, Dudley had an outsize influence on Fed policy. Not only was he vice chairman of the Federal Open Market Committee, which sets monetary policy, but the New York Fed controls the Fed’s open market operations, which puts Fed policy into action.

So, is Trump out of line in his behavior, demanding that the Fed cut interest rates by an absurd 100 basis points while constantly threatening to fire or demote Powell? Absolutely. But the president has every right to try to influence government policy. The president’s office is, by definition, a political one, so it would be absurd to think or expect otherwise. Basically, he can do whatever he wants, or, more accurately, thinks he can get away with.

However, for certain government officials, we are supposed to pretend – yes, pretend – that they aren’t political, like members of the Fed and the Supreme Court. Now, however, we have William Dudley to thank for exposing that as the hogwash it always was.

Sen. Thom Tillis, R-N.C., a member of the Senate Banking Committee, rightfully has called for the panel to investigate “Fed independence and the danger of this institution taking unprecedented and inappropriate steps to meddle in the presidential election.”

So how might this episode affect Fed policy going forward? Dudley has put Fed chair Jerome Powell and the rest of his former Fed colleagues in an even more uncomfortable position in trying to steer monetary policy while trying to appear like they’re not kowtowing to Trump. If so, then, in some crazy, unintended way, Dudley might actually force the Fed to keep politics out of their decisions. If so, he will have performed a public service.

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George Yacik
INO.com Contributor - Fed & Interest Rates

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.