Former President Donald Trump wants a say in monetary policy decisions. He has tried to clarify that his goal is simply to give his opinion. But we know that he was upset with and opposed to the Federal Reserve’s recent decision to lower interest rates by half of a percentage point and that he toyed with firing the Fed’s chair, Jerome Powell, in his first term. Moreover, Mr. Trump’s supporters apparently have compiled a list of proposals that give the former president new ways to exert influence.
Giving any president a substantive role in monetary policy would be a terrible idea. Congress created the Fed to make such calls using its judgment free from short-term political pressures. History tells us that eroding that independence — allowing politicians, whose horizons extend only to the next election, to have an effective say on policy — produces inflation and economic instability.
The threat of substantive presidential input to monetary policy would undermine the public’s trust that the Fed will do what it judges to be in the best long-term interest of the economy and the American people. That could lead to higher interest rates as investors price in faster price increases and more uncertainty.
Mr. Trump is far from unique. Many presidents who “wanted a say” in monetary policy have exerted public and private pressures on the Fed’s interest rate decisions. Harry Truman wanted to keep the Fed on a short leash so that it would continue the low interest rates it maintained to help finance World War II. Lyndon Johnson leaned all over (literally as well as figuratively) Chairman William McChesney Martin to keep rates low when inflation was rising during the Vietnam War. Richard Nixon exerted considerable pressure on Arthur Burns in the 1970s to keep the economy roaring into elections, and unfortunately, Burns acceded, contributing to the great inflation of the 1970s.
Ronald Reagan, through his then-campaign manager James Baker, ordered Paul Volcker not to raise rates in the lead-up to the 1984 election. George H.W. Bush was a frequent public voice urging Alan Greenspan to lower rates in the late 1980s and early 1990s. In his first term, Mr. Trump called Mr. Powell an “enemy” of the country for not following his advice to ease policy.
Presidents’ desires to influence the Fed are understandable. They get blame or credit for the state of the economy but don’t have their hands on perhaps the most important lever, which is monetary policy.
But all that pressure has been in one direction — favoring lower interest rates — and that’s the problem. In general, easier monetary policy will first juice output and employment and only later produce higher inflation. That’s a powerful incentive for politicians running for re-election to favor easier policy now, ignoring the ultimate consequences.
Since 1979, the Fed has focused on tuning out the political noise and instead marshaling data and analysis to hit its legislated goals of stable prices and maximum employment. The result has mostly been mild economic cycles and low inflation — excepting the financial crisis in 2008-09 (on output) and for Covid recovery (on inflation). Most recently, hopes are high that, using judgment insulated from political pressure, the Fed has engineered a “soft landing” from the high inflation of the post-Covid period, reducing demand enough to bring inflation down while keeping the economy and job market humming along.
Recognizing the advantages of a largely technocratic institution with a longer perspective than the next election, Congress tied its own hands and those of the president to control monetary policy in the short run. It fixed the terms for the chairs, vice chairs and members of the Board of Governors; it established 12 regional reserve banks to supply an outside-the-Beltway perspective to policy deliberations; and it allowed the Fed budgetary autonomy.
Of course, the president and Congress have every right to voice their views on monetary policy in public or private, and the Fed must be held accountable for its actions. Presidents can influence the Fed through the people they appoint to the Board of Governors — including the chair and vice chairs, subject to the advice and consent of the Senate. The Fed and each administration are in regular contact through the Treasury Department, the Council of Economic Advisers and occasional meetings of the president and the chair. I can attest from firsthand experience with many of these meetings that they can involve a “robust exchange of views” — and that’s fine.
The president’s decision about whether to reappoint a chair or vice chair has proved to be an important element of Fed accountability. In addition, Congress requires semiannual monetary policy reports and testimonies. It uses those testimonies and other channels — such as letters and meetings — to get its voices heard and press the Fed on its policy choices.
For many years I sat behind Fed chairs as they gave their monetary policy testimonies. Some of those hearings were contentious, but I never heard a member of Congress push for a less independent Fed.
There are good reasons to think whoever wins the next election, political pressure on the Fed to keep interest rates low will intensify. No candidate has a credible plan to reduce still-sizable federal deficits and bend the rising trajectory of federal debt relative to the nation’s income. Interest on the debt will be a growing obligation of the federal budget, potentially constraining spending on other priorities and limiting the scope for tax cuts. Members of both parties will want lower interest rates so that they can fund their favorite proposals, adding to the usual election-year political pressure.
Giving the president or Congress a larger say in setting monetary policy would risk higher inflation and repeated cycles of economic instability. That’s because the Fed would eventually have to slam on the brakes to achieve its mandate of promoting stable prices. Congress was wise to give the Fed this objective. We’ve seen in recent years how inflation can distort market signals, make it hard to plan and redistribute income in arbitrary ways. People really don’t like inflation — and for very good reasons.
Ensuring that the Federal Reserve’s monetary policy decisions are based on the best economic information and analysis, insulated from political interference, is no guarantee of price stability — as we’ve seen in recent years. But history indicates it is the best way to achieve and maintain price and economic stability over time. The welfare of the American people depends on resisting efforts to erode the Fed’s independence.
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