Trump as de facto Fed chair is a dangerous idea

Donald Trump appears to be totally serious about his plan to give presidents a say in monetary policy, a proposal that would undermine decades of Federal Reserve independence, unsettle markets and hurt the nation’s ability to control inflation in the long run. It’s one of the worst economic proposals ever floated by a major-party presidential candidate.

The idea was first discussed in a jarring Wall Street Journal report in April, citing unnamed sources, which my Bloomberg Opinion colleague Tyler Cowen wrote about at the time.

Then last Thursday, the former president laid out his feelings on the matter at a press conference from Mar-a-Lago, and his running mate J.D. Vance defended the proposal in an interview aired Sunday on CNN. By now, anyone inclined to downplay the threat ought to reconsider.

Donald Trump when president directly attacked Fed chair Jerome Powell.Credit: AP

Decades of research and real-life experience have shown that independent central banks devoid of political interference deliver the best results. In the absence of such norms, the temptation becomes much too great for incumbent politicians to encourage easy policy in election years. Indeed, political actors essentially dictated policy for decades up until Fed leadership won certain guarantees of independence in the years shortly after World War II.

Since then, further gains were often plodding and uneven on their way to a golden era of Fed independence enjoyed from Bill Clinton to the present day, when presidents — except Trump — declined to pressure the Fed on its rates policy. Unsurprisingly, that era also coincided with a period of low inflation and the record-long economic expansion that ended with the COVID-19 pandemic.

In 2018 and 2019, Trump torpedoed the modern convention that presidents stay mum on monetary policy. He directly attacked Fed chair Jerome Powell — his own pick for the job — and openly lobbied for lower rates in a series of high-profile interviews and Twitter posts. Now, he wants to go further and reopen the debate about White House influence on the Fed’s rate-setting committee.

Trump thinks that his experience as a reality television star and casino and real estate investor … has given him a better sense of monetary policy than the members of the rate-setting committee and the hundreds of PhD economists working in their orbit.

Here’s how the former president put it on Thursday: “I feel the president should have at least [a] say in there. Yeah, I feel that strongly. I think that in my case I’ve made a lot of money, I was very successful, and I think I have a better instinct than, in many cases, people that would be on the Federal Reserve or the chairman.”

In other words, Trump thinks that his experience as a reality television star and casino and real estate investor — with numerous associated bankruptcies — has given him a better sense of monetary policy than the members of the rate-setting Federal Open Market Committee and the hundreds of PhD economists working in their orbit.

Lest anyone assume that Trump is just tossing around ideas to see what sticks, here’s his running mate Vance speaking to CNN’s Dana Bash: “Whether the country goes to war, what our interest rates are — these are important questions that American democracy should have important answers for.

“And I think all president Trump is saying is that, look, it’s kind of weird that you have so many bureaucrats making so many important decisions. If the American people don’t like our interest rate policy, they should elect somebody different to change that policy. Nothing should be above democratic debate in this country when it comes to the big questions confronting the United States.”

That’s the wrong way to think about it. The American people shouldn’t be choosing their own interest rate policy any more than they should be serving as their own doctors, representing themselves in court or building their own bridges. There are some things that are best left to professionals, and history has shown that to be the case with interest rate policy, too.

It’s true, of course, that democracy should have a say in which professionals are empowered to pull the levers at the Fed, the most important institution in global finance, and indeed that’s already true.

Presidents nominate members to the Federal Reserve Board of Governors for 14-year terms — a period meant in part to shield the board from the political cycle — and also get to nominate the chair and vice chairs for four-year periods.

These professionals are responsible for setting monetary policy. In addition to Powell’s elevation to chair, two members of the seven-member board are Trump appointees. If you gave presidents any more power at the Fed, it would constitute an unfair advantage for the incumbent president.

History is riddled with examples of why any further intervention by politicians is a bad idea. Richard Nixon nominated Arthur Burns as chairman starting in 1970 with a tacit understanding — that Nixon even joked about at Burns’ swearing-in ceremony — that the former economic counsellor to the president would deliver lower interest rates.

And Nixon regularly talked with the Fed leader in an overly cosy relationship that would be partially blamed for the most inflationary decade in modern American memory — a mess that was only remedied when Paul Volcker became chair and effectively drove the country into recession to restore a stable-price environment. After that, it took decades of work to build up the Fed’s credibility and anchor the public’s inflation expectations.

What concerns me most is that I suspect the Trump-Vance argument is probably good politics but awful policy. In a survey from last year, a plurality of respondents thought the Fed was doing an “only fair” job — similar to the public’s relatively dim view of the Internal Revenue Service.

Republicans in particular give lousy marks to the Fed and many other agencies. Understandably, any American trying to buy a home or a car probably hates that policy rates are at a two-decade high. In reality, the high rates constitute a sometimes painful “medicine” meant to cure the inflation “disease,” but the trade-offs can be hard to explain to a voting public that’s struggling in the here and now.

Running mate J.D. Vance has defended Donald Trump’s interest rates proposal.Credit: AP

Granted, many of us in the commentariat criticise individual Fed decisions, and I’m personally on the record in recent weeks complaining about how policymakers have been late to cut rates this cycle. These policymakers are far from perfect. But inflation following the COVID-19 pandemic was a global phenomenon, and policymakers have so far done heroic work to bring it back down without causing a recession.

Given the circumstances, the Powell Fed has been very, very good at its job. Of course, it’s unlikely that they would have been as successful as they were if not for Fed independence and the subdued inflation expectations that came along with it. If Trump gets his way, he could undermine all of that — and also make future presidential elections less fair.

Bloomberg

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.