Former New York Fed President William Dudley has received a great deal of well-deserved criticism for these remarks:
“I understand and support Fed officials’ desire to remain apolitical. But Trump’s ongoing attacks on Powell and on the institution have made that untenable,” Dudley wrote, referring to Fed Chair Jerome Powell. “Central bank officials face a choice: enable the Trump administration to continue down a disastrous path of trade war escalation, or send a clear signal that if the administration does so, the president, not the Fed, will bear the risks — including the risk of losing the next election.”
Although Dudley is viewed as a foe of Trump, their views on monetary policy are actually quite similar. Both favor a Federal Reserve that advances their preferred political goals.
As President, Trump has frequently asked the Fed to help him in his trade war with China by cutting interest rates. You might argue that this is not being political, as Trump’s always been a fan of low interest rates. Here’s Trump in May 2016:
“I happen to be a low-interest rate person unless inflation rears its ugly head, which can happen at some point,” Trump told The Wall Street Journal in May. The mogul went on to tell the paper that high rates make American exports less competitive, while also increasing our country’s borrowing costs.
In that case, there is indeed nothing wrong with Trump calling for low interest rates today. Rather, the real problem occurred in September 2016, when Trump objected that low interest rates were improving the US economy and thus making President Obama look good:
On Monday, Donald Trump said that Janet Yellen is keeping interest rates low so that the stock market won’t crash — and that she should be “ashamed of herself” for doing so.
“She’s obviously political and doing what Obama wants her to do,” Trump said of the Federal Reserve chair on CNBC, before explaining that the central bank would not raise interest rates because it didn’t want the economy to implode on this president’s watch.
Matt Yglesias pointed to the obvious problem with Trump’s remarks:
[T]he way low interest rates are allegedly helping Obama is by improving economic conditions. But improving economic conditions is what the Fed is supposed to do. Why would they be ashamed?
In a more recent post, Yglesias observed that this sort of attempt to politicize of monetary policy is not new:
And, indeed, back in 2010, Bush-appointed Fed Governor Kevin Warsh openly called for the Fed to take a more punitive approach to the Obama administration’s policies. Former St. Louis Fed President William Poole made the same argument in a piece for the Cato Institute in 2012.
At around the same time, the European Central Bank was actually putting these ideas into practice in an extremely dangerous way.
As Philipp Rösler, at the time vice chancellor and economics minister of Germany, explained, “if you take away the interest rate pressure on individual states, you also take away the pressure for them to reform.”
And of course there are famous examples involving Presidents Johnson and Nixon. Nonetheless, the Dudley/Trump view of monetary policy is especially dangerous. While it is harmful to ask the Fed to make your administration look good by improving the economy (at the cost of future pain), and even more harmful to try to use monetary policy to discourage what you see as a bad policy, it is especially dangerous to ask the Fed to intentionally damage the economy to achieve your own political goals.
That is how banana republics behave.
PS. It’s possible to play words games and suggest that the Trump and Dudley comments don’t mean what they seem to mean. Sorry, but you’ll never convince me on that point. I’m quite confident that I know exactly what these two meant.
READER COMMENTS
Brian Donohue
Aug 29 2019 at 9:24am
There are no good guys here. The Fed needs to understand that politicians gonna politic, and a big part of their job is to keep their eye on the ball rather than get dragged into these fights.
Billy Kaubashine
Aug 29 2019 at 1:07pm
It seems pretty clear to me. On one hand you have Trump who (rightly or wrongly) is fighting a trade war and wants the Fed to make that war as painless as possible for the domestic economy, because he thinks it will improve the chance for success.
On the other hand you have Dudley, who disagrees with Trump’s trade war (and most everything else Trump stands for) and thinks it is acceptable for the Fed to violate it’s mandate in order to sabotage a policy he disagrees with.
By Dudley’s logic, if Rosie thought WWII was a bad idea she would have been justified in leaving out a few strategic rivets.
Gary Anderson
Aug 29 2019 at 2:21pm
I think that if interest rates were higher, this article would be correct. However, as we approach zero lower bound, this becomes an exceptional time. Tariffman Trump is a clear and present danger to the USA and world economy. The Fed does not want negative rates which will weaken the banks. The Fed waited too long to lower in the Great Depression. But rates were higher then. So I am with Dudley. Scott talks about Sweden with negative rates and nominal GDP at 5 percent. Sounds good but what about real growth and bank stability over time? I see why the Fed does not want to go down that path. Negative rates are generally associated with little economic growth.
Thaomas
Aug 30 2019 at 9:09am
The Fed’s job is not to prevent “weakening of the banks” except at that contributes to less than full employment or inflation being greater or less than the optimal target. It should fulfill it’s Congressional mandate regardless even if that minimizes the damage of bad policy like the trade wars (or immigration restrictions or increases in the federal deficit, or what ever).
ChrisA
Aug 30 2019 at 1:39am
If there was a clear mandate for the Fed to level target NGDP growth at 5% based on an unambiguous market signal then none of the politics would apply. It is the closely defended “discretion” of the Fed that creates the problem. They want smoke and mirrors partly for agency reasons, partly because they don’t have a clear view on how monetary policy works. The result is that the Fed is going to be continually dragged into politics whenever a politician feels like they are not getting the support they think they should get.
Mike Sandifer
Aug 31 2019 at 7:46am
I agree that the Fed should remain apolitical, but the Democrats should get much more political and really let Republicans have it.
Mark Z
Aug 31 2019 at 4:05pm
Those two statements seem to be in contradiction.
I remember reading Mark Tushnet’s article arguing something like this but regarding the judiciary; he argued they should just abandon all inhibitions and use the judiciary as a political cudgel against Republicans and their policies. Accept that it has to be total war. I imagine he had ‘No more Mister Nice Guy’ playing as he wrote it. It was written just before the 2016 election.
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