President Donald Trump has had (what else?) a publicly tempestuous relationship with the Federal Reserve System.
Fed Chairman Jerome Powell has adhered to the Fed’s official traditional position of being apolitical. Typical of Powell’s statements is the unequivocal assertion, “Political considerations play no role whatsoever in our discussions or decisions about monetary policy.”
Unfortunately for Chairman Powell, William Dudley, the previous president of the New York Fed, recently published a commentary which cast serious doubts on the Fed’s alleged political neutrality. Complaining about Pres. Trump’s trade policies, Dudley suggested that the Fed refuse to adjust policy to compensate for the economic slowdown caused by the trade war.
Further, in the words of a report published on slate.com (hardly a Republican propaganda outlet), Mr. Dudley opined that, “the Fed should let the economy tank.” And for what great and noble cause would Dudley want to tank the economy and inflict economic harm on millions of American citizens? His goal, in his words, would be to “affect the political outcome in 2020.” To be more explicit, Dudley wrote that “Trump’s reelection arguably presents a threat to the U.S. and global economy,” and since the Fed’s job is to help the economy, Fed officials would be justified in tilting the 2020 election to Trump’s opponent, whoever that may turn out to be. (To give credit where it is due, Slate.com—again, hardly a Republican news outlet—strongly objected to Dudley’s proposed power grab.)
Dudley’s thoughts are astonishing and alarming.
First, it’s possible that Democrats could nominate a socialist as their presidential candidate. Does Dudley think that a socialist would pursue policies that are better for the economy than Trump’s policies which, apart from the trade war, have improved economic conditions?
Second, but of far greater fundamental importance, does Dudley not see the ominous antidemocratic nature of his remarks? The Federal Reserve chair is often regarded as the second-most powerful person in the country after the president, certainly from an economics perspective. That itself is anomalous in a democratic republic. Should anyone who is unelected and unaccountable to the people have that much power? And now, to even talk about a small group of unelected bankers arrogating to themselves the role of king-makers by taking a side in a presidential election constitutes a notable disrespect for the American people. The Trumpistas might be justified in fearing this as a “deep state” effort against their guy.
Then again, the Fed has been a problematical institution from the start, and the notion that it has always been an apolitical institution is a myth.
Former Chairman Arthur Burns (1970-78) accommodated President Nixon’s “guns and butter” spending splurge. That was a splurge started under Lyndon Johnson, but which Nixon–a political pragmatist rather than the conservative he is sometimes portrayed as—was unwilling to reverse.
Former Chairman Ben Bernanke (2006-2014) adopted a long-term zero-interest rate policy that deprived the American middle class of the ability to earn a traditional modest rate of interest in safe bank accounts while enabling the Obama administration to rapidly increase the national debt by suppressing the cost of such extravagance.
Bernanke’s successor, Janet Yellen (2014-2018), maintained the zero-interest rate policy as well as Bernanke’s two-percent inflation target–that is, until the political winds shifted and Donald Trump became president. It is hard to think of a more unfair Fed policy than depriving middle-class Americans of returns on their savings while simultaneously trying to reduce their purchasing power by two percent per year.
The policies of the Federal Reserve have seemed to accommodate the policies of whoever occupied the White House, even when those policies (especially non-stimulating “stimulus plans”) were economically counterproductive.
Just over two centuries ago, Thomas Jefferson wrote to John Taylor, “that banking establishments are more dangerous than standing armies.” Indeed, William Dudley’s thinking-out-loud episode validates Jefferson’s concerns. If Dudley is willing to share such ominous machinations with the public, I wonder what the current leaders of the Fed are talking about behind closed doors.
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