Former New York Federal Reserve President Bill Dudley wrote an oped on Bloomberg saying that “the election itself falls within the Fed’s purview,” and that the central bank ought to do whatever it takes to make certain President Donald Trump loses the 2020 presidential election.
In short, Dudley wants to politicize the Fed’s operations.
“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,” Dudley wrote, adding, “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.”
You can almost cue former President George W. Bush saying during the financial bailouts of 2008 that he had to abandon free market principles in order to save the free market. Here, Dudley’s formulation is that the Federal Reserve must sacrifice its independence from politics in order to somehow preserve it, and that it must hurt the economy now in order to prevent Trump from being reelected in 2020, so that it can save it.
In the immediate instance, it might mean the Fed could hold off on cutting interest rates even if economic conditions — like the relatively strong dollar — warranted such a rate cut. Or to even raise rates at the wrong time to hurt the economy, all for political gain.
Americans for Limited Government President Rick Manning blasted Dudley in a statement, saying, “The audacity the non-elected central bank seeking to impact election outcomes and fiscal policies is only exceeded by the 2016 attempt of the nation’s intelligence agencies and Justice Department to stop the election of Trump and their subsequent efforts to unseat him. Federal Reserve Chairman Jerome Powell needs to denounce Dudley’s remarks immediately and forcefully if the central bank is to retain any shred of credibility.”
That’s right. The problem with Dudley’s brazen call to politicize the Fed’s mission is that reveals members of the unelected administrative state saying they believe it is their job to defy the will of the American people, just like the intelligence agencies and the Justice Department that sought to overturn the outcome of the 2016 election. No real conspiracy with Russia? That’s fine. They’ll invent one. Need a recession to force a few million Americans to lose their jobs in time for 2020 so they’ll vote against Trump? No problem. The Fed can engineer one.
The real disagreement, of course, is between the financial and political class of Washington, D.C. establishment and President Trump and his push for fair and reciprocal trade agreements with China and other countries. In Trump’s case, he is using authority granted by Congress to levy countervailing tariffs — essentially sale taxes — on Chinese goods, going up to 30 percent on $250 billion of goods and up to 15 percent on the remaining $300 billion of goods.
But the President, under long-standing federal laws, is supposed to set the country’s trade policy, just as Congress and the President set fiscal and budget priorities every year and make changes to tax law. What if the Fed suddenly decided that taxes were too high or too low, or spending too high or too low, and started monkeying around the economy until Congress complied with the central bank’s preferred policies? Where does it end?
This is clearly a breach of the appearance of the Fed’s independence.
Right now, the 10-year, 2-year treasuries spread, a reliable recession predictor, is now fully inverted. It has been a full decade since the last recession, when in the postwar period, the economy has averaged a recession about once every 5 years. Based on past inversions, you might expect a recession by, say, sometime in 2021.
Meaning, we might be seeing the same such inversion even if Hillary Clinton had been elected in 2016 and there was no trade dispute with China. Can Dudley say with any certainty that economic conditions would otherwise be any different if Clinton had won? Maybe we’re simply nearing the end of the business cycle. It is not the Fed’s job to get involved with this sort of counterfactual, hypothetical political analysis.
In the meantime, there are legitimate criticisms that the President is making of monetary policy, namely, the central bank does not appear to care a whit about exchange rates. If the dollar is too strong relative to other currencies like the yuan or euro — an objective measure, it either is or it isn’t — or if monetary policy is too tight, then cut rates. It’s a fact that as the world’s reserve currency, financial institutions and central banks will go into U.S. treasuries and bonds generally in a flight to safety in adverse economic conditions. This has a rate-cutting effect during slowdowns and downturns. If the Fed is too slow to move its policy rate downward, it can inadvertently trigger the very inversions everyone is worried about. In fact, the federal funds rate and 10-year treasuries have been inverted since May, and the Fed has not acted to cure the inversion.
The central bank already waited too long earlier in the cycle to hike the federal funds rate prior the 2016 election, giving the appearance of owing political favors to the incumbent Democrats to have an easier monetary policy to help Clinton win, and then only fully began hiking upward after Trump won. Now, rates are inverting just in time for political season. Even without Dudley’s comments, it already has the appearance of acting politically.
And while the Fed has no business meddling in politics, as an appointed position in the executive branch, there is a clear line of oversight by the President of the Federal Reserve Board of Governors. Under 12 U.S.C. Section 242, “each member [of the Federal Reserve Board of Governors] shall hold office for a term of fourteen years from the expiration of the term of his predecessor, unless sooner removed for cause by the President.” If the President has reason to believe that members of the central bank are acting politically, he can remove them under the law. Something the Board of Governors should keep in mind when it meets again in September.
Robert Romano is the Vice President of Public Policy at Americans for Limited Government.