Trump isn’t crazy to attack the Fed

Today, as the Federal Reserve meets to set monetary policy, it will also be bracing for another round of attacks from Donald Trump. In one of the many twists of this strange election season, Trump has gone straight after Fed chairwoman Janet Yellen, saying she should be “ashamed” of keeping interest rates low, and accusing the Fed of creating a “false economy” and doing “political things.” If the Fed declines to raise rates today, as is expected, he will likely attack the central bank yet again.

The implication of Trump’s attacks is that the Fed is just another institution rigged against Trump: that Yellen is keeping rates artificially low to help the economy, which helps the Democrats look better and thus helps his opponent, Hillary Clinton.

Economists, and a lot of political observers, have been horrified by Trump’s direct attacks: What seems normal for the pugnacious outsider candidate is a major violation of American political norms. Politicians aren’t supposed to push the Fed one way or the other; it’s a point of pride for the Fed, and for the nation overall, that the central bank sets policy independent of political pressure. Economists credit central bank independence as one of the great economic success stories of the 20th century, paving the way for lower inflation and stronger growth.

But how far off is he, really? It’s true that the Republican nominee is violating tradition: critiquing individual policy decisions shows that he doesn’t respect the line between politics and monetary policy. And there’s an implicit threat that could genuinely damage the Fed’s autonomy: He’s signaling that Fed leaders would be on notice in a Trump administration, and could pay a price for making decisions he didn’t like.

But the line between politics and the Fed is far blurrier than the conventional wisdom would have it—and politicians before Trump have crossed it in much more serious ways. Moreover, buried within Trump’s comments is a kernel of truth: The Federal Reserve is, by definition, not independent. Unlike the Supreme Court, the central bank is a creation of Congress and is accountable to lawmakers on Capitol Hill. It can be changed—or abolished—by Congress as well. And to pretend it’s not—to treat the Fed as an entity totally removed from American politics—also leaves us powerless to talk about the ways it might be improved.

It’s important to point out that Trump’s immediate accusations are almost certainly wrong: Economists across the political spectrum reject Trump’s claims that Yellen is declining to raise interest rates to improve Clinton’s election odds. Yellen, who has also firmly rejected Trump’s claims, does not set monetary policy alone; it’s set by the 12 members of the Federal Open Markets Committee. (Currently, it has just ten members.) That means no individual member, or even small group of members, can tip the scales to benefit a certain candidate. And any collusion would also be difficult to hide: Transcripts of FOMC meetings are released publicly (though on a five-year delay), and Yellen testifies before Congress four times a year.

“The fact that I don’t happen to agree with the conduct of policy doesn’t mean that they are being political,” said Glenn Hubbard, the dean of Columbia Business School and former top economist to President George W. Bush, who believes rates should rise faster. “I think that’s very unfortunate.”

A real example of political interference with monetary policy occurred in the early 1970s. Taped recordings of Richard Nixon provide clear evidence that Nixon pressured then-Fed Chair Arthur Burns to adopt expansionary monetary policies to improve his reelection chances. For instance, before Burns was confirmed by Congress, Nixon told him: “I know there’s the myth of the autonomous Fed … and when you go up for confirmation some senator may ask you about your friendship with the president. Appearances are going to be important, so you can call [Nixon economic advisor John] Ehrlichman to get messages to me, and he’ll call you.” Nixon met with Burns frequently and tacitly pressured the chairman to keep policy loose. The FOMC transcripts indicate that many Fed members had doubts about the policy decisions but voted for them anyways.

Trump’s criticism of the Fed on the campaign trail doesn’t approach Nixon’s actual interference in monetary policy from the White house. But it does raise the broader question of what constitutes “political interference” in the Fed, and what constitutes legitimate criticism. One key distinction: Nixon used his presidential powers to influence Burns, while Trump currently has no such power over Yellen. But Trump, if elected, will also nominate the next Fed chair. That inherently means his criticisms of the central bank veer closer to political interference than critiques from academics like Hubbard.

“The line is blurry,” said Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics who has worked at the Fed intermittently for the past 30 years.


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