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Assault on the Fed Continues

The Federal Reserve’s independence is under attack. I think this was inevitable once the Fed made it clear they intended a monetary offset against Trump’s fiscal stimulus. Now it is the reality. Can this genie be put back into the bottle? I am not particularly confident it ends here. If President Trump is successful at packing the Fed with political partisans, there may be nothing to stop the next president from doing the same.

If the potential nomination of Stephen Moore wasn’t bad enough, now we have to contend with the potential nomination of former presidential candidate Herman Cain. Cain is yet another candidate who appeals to the hawkish elements of the right wing. This short summary from Bloomberg is all you need to know:

He advocated for the U.S. to return to the gold standard during his presidential campaign and as recently as December 2017 defended higher interest rates, a position that contrasts with Trump’s repeated criticisms of the Fed last year.

Of course, Cain’s hard money advocacy will likely prove to be like Moore’s, simply a politically play to capture far right wing voters:

Trump’s recent nominees reflect his displeasure of the Fed’s rate hike campaign. That displeasure reached a peak in December as the Fed continued hiking rates while markets were tumbling. Since then the Fed has backed away from future rate hikes and in the process helping (hopefully) to keep the expansion alive. The political damage, however, was already done. Trump won’t trust the Fed going forward, nor will he trust those who gave him the names of those the Fed governors he already appointed.

For what it’s worth, the Fed itself shares some of the blame for this mess. The December rate hike aside, the Fed needs to come to grips with the reality that they have been fighting an inflation ghost for years. They haven’t treated their 2% target as a symmetric objective, but as a ceiling. Any central bank that fails to follow through on their mandate will come under fire eventually.

To be sure, perhaps neither Moore nor Cain make it through the Senate. Senator Mitt Romney, for example, appeared less than thrilled about the idea. That, however, doesn’t mean the institution walks away unscathed. The idea that Fed governors should be political partisans is now out in the open. Would a President Sanders follow Trump’s lead? Maybe those don’t get through the Senate as well, but then the Fed continues to operate with less than a full allotment of governors. That then shifts more power to the regional presidents, which changes the nature of the institution as well.

Of course, the ultimate concern is that the Fed shifts from a technocratic institution to a purely political one. One possible outcome is that the net result is a Fed that invites a repeat of the 1970s through excessively easy policy. Another is a Fed that works to ensure the dominance of one political party. Would Moore or Cain suddenly turn hawkish again if a Democrat were in the White House? 

Bottom Line: Maybe if the Fed fends off these assaults and the process reverts to credible, technocratic nominees, the Fed can walk away a stronger, more independent institution. Right now though I am not feeling so hopeful. That said, these are more long- than near-term concerns.