Washington Update: Fed Bashing - A White House Tradition
James Carville, a strategist to then-Gov. Bill Clinton’s insurgent 1992 campaign for the presidency, famously – and succinctly – captured the essence of the race for the White House with the phrase “it’s the economy, stupid.” As we begin the march towards the twenty-eighth anniversary of President Clinton’s defeat of President George H.W. Bush, Carville’s truism still holds.
As of this summer, the U.S. economy has enjoyed the longest expansionary period in its history. But the economy created just 75,000 jobs in May and, earlier this month, a key reading for U.S. manufacturing fell to its lowest level since just after the financial crisis in 2009. Is the White House worrying the country is heading into a recession just as the 2020 election is heating up?
Judging by statements from the Commander in Chief, anxiety is building in the Oval Office.
On Twitter this week President Donald Trump had particularly strong words for Federal Reserve Chair Jerome Powell. The Fed, of course, has kept rates steady of late rather than move to an expansionary monetary policy. The president argued, “Think of what it could have been if the Fed had gotten it right. Thousands of points higher on the Dow, and GDP in the 4’s or even 5’s. Now they stick, like a stubborn child, when we need rates cuts … Blew it!”
The Federal Reserve is not supposed to take advice from the White House or Congress – or any politicians, for that matter. The Board’s mandate, as defined by Congress, is to foster policies that produce “maximum employment and stable prices.” While Congress set that mission, it also “structured the Federal Reserve to ensure that its monetary policy decisions focus on achieving these long-run goals and do not become subject to political pressures that could lead to undesirable outcomes.” The Fed, for example, does not subsist on congressional appropriations and elected officials and members of the president’s administration are not allowed to serve on the Board.
Why is Fed independence important?
As Michael Klein, professor of International Economic Affairs at Tufts University’s Fletcher School, explained, “Research has consistently shown that economies … perform better when their central banks are more independent.” Last October, Mario Draghi, president of the European Central Bank, warned, “[I]f central banks were less independent, and the public perceived that monetary policy could be pressured in either direction, it would eventually de-anchor inflation expectations and jeopardize price stability – just as in the 1970s.”
Research and warnings be damned, though. American presidents have still tried to exert influence over the Federal Reserve for decades.
Indeed, while it would be easy to chalk the Tweet above up to Trumpian hyperbole, Fed-bashing is hardly a new phenomenon at 1600 Pennsylvania Avenue. “Other presidents have also seen the Fed as their nemesis,” The New York Times explained this week, and have groused when the Fed raised interest rates. President Richard Nixon pressured Chair Arthur Burns to keep rates in check during his reelection campaign in 1972 and President George H.W. Bush all but blamed then-Chair Alan Greenspan for his 1992 loss.
According to reporter Andy Serwer, the elder President Bush had a “tortured” relationship with Greenspan, who took the helm of the Fed in 1987 during the Regan administration. The late commander in chief told an interviewer, “I think that if the interest rates had been lowered more dramatically that I would have been re-elected president because the [economic] recovery that we were in would have been more visible … I reappointed him, and he disappointed me.”
Perhaps Bush learned from the man with whom he was elected.
According to Paul Volcker, who served as Fed chief throughout most of President Ronald Reagan’s two terms in office, in a 1984 meeting in the Oval Office with President Reagan and his then-Chief of Staff James Baker, Baker said, “[T]he president is ordering you not to raise interest rates before the election.” Volcker, according to The Times, “walked out without replying.” In his memoir, Volcker wrote, “I was stunned. Not only was the president clearly overstepping his authority by giving an order to the Fed, but also it was disconcerting because I wasn’t planning tighter monetary policy at the time.”
The exchange between Reagan, Baker and Volcker apparently was not even the most heated between White House officials and a Fed chair. After the Federal Reserve raised short-term rates in late 1965 due to worries about inflation and the escalating conflict in Vietnam, President Lyndon B. Johnson reportedly physically pushed William McChesney Martin Jr., who ran the Fed for the 19 years between 1951 to 1970, against a wall and “dressed him down.”
Martin’s Fed raised rates again the next year. President Johnson opted not to run for reelection.
The Clinton administration took a different path than some of his predecessors. According to scholars at the University of Virginia’s Miller Center, while President Bill Clinton and his top economic advisers paid very close attention to the Fed, they preferred to air their displeasure behind closed doors … and to one another, not even to Fed board members.
According to Alan Blinder, who was a member of Clinton’s Council of Economic Advisers, when Alan Greenspan’s Fed started to raise interest rates, President Clinton “was totally enraged … But to his everlasting credit … this was all private. He never made a peep publicly that he was angry at the Fed, or in any way hinted that he was trying to jawbone the Fed. And he didn’t, to my knowledge, ever pick up the phone and scream at Alan Greenspan. If that ever happened, I didn’t know about it. And I think I probably would have known about it.”
According to The New York Times, Clinton’s team was responsible for the silence, having convinced their boss that complaining “publicly about the Fed was useless.”
Respecting Fed independence carried over to the next administration. A 2000 International Herald Tribune story about then-candidate George W. Bush’s policy stances, said the future president even proclaimed that he “generally supports Federal Reserve Board's rate increases to dampen inflation.”
President Barack Obama was somewhat less restrained (though he also was far from Johnsonian or Trumpian). While he praised then-Fed Chair Ben Bernanke in a 2013 interview, the commander in chief also said the Board chief “already stayed a lot longer than he wanted, or he was supposed to.”
According to MarketWatch, there is no evidence that Fed-bashing from the White House has ever resulted in the Board changing its mind about where rates should be set.
But that might not be the point. University of Maryland Professor Irwin Morris, an expert on the relationship between presidents and Fed chairs, told MarketWatch, “[T]here is relatively little evidence that the Fed responds to short-term presidential efforts to micromanage its monetary policy activities.” The best a president can hope for then, Morris said, is to “shift blame” away when the economy goes south.
In other words: pay careful attention when watching how President Trump reacts on Friday, July 5 when the U.S. Department of Labor announces jobs numbers for June.
Steve Boms is the founder and President of Allon Advocacy, LLC, a Washington, D.C.-based public policy consulting firm. Steve has spent his career focused on complex financial services public policy issues, having worked in the United States Congress on the committee with jurisdiction over banking. He has led advocacy efforts and public policy teams globally for equity options exchanges, large U.S.-based financial institutions, and leading fintech firms. In addition to working directly with Allon's clients, he is a frequent conference panelist and his perspective is solicited by reporters on the technology, financial services, and regulatory beats.
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