Trump’s Fed attacks cast a chill at global finance gathering
Former central bankers worry about erosion of U.S. institution’s nonpolitical stance
WASHINGTON— Former Federal Reserve officials and foreign central bankers said President Trump’s combative stance toward the U.S. central bank could over time weaken the institution and its role in the global economy.
A string of central bankers, including several gathered in Washington for International Monetary Fund meetings over the weekend, expressed concern about the Fed’s political independence as Mr. Trump again criticized the central bank and as he seeks to nominate two stalwart political supporters to the organization who also disapprove of its actions.
Though the Fed signaled in recent weeks that it was done for now with interest-rate increases, Mr. Trump wrote Sunday on Twitter that the economy and stock market would be growing faster “if the Fed had done its job properly, which it has not.”
The central bankers said they are concerned the GOP president’s approach could erode nonpartisanship in the Fed’s boardroom over the long run. They cited that longstanding tradition as part of the reason the Fed is a global role model for apolitical policy-making.
“I’m certainly worried about central bank independence in other countries, especially…in the most important jurisdiction in the world,” said European Central Bank President Mario Draghi at a news conference here Saturday, referring to the U.S.
Earlier this month, White House economic adviser Lawrence Kudlow said the administration respects the Fed’s independence. While he as well as the president have called on the Fed to cut interest rates, Mr. Kudlow said: “The Fed is independent. We’re not trying to compromise that independence and never will.”
Narayana Kocherlakota, former president of the Minneapolis Fed, said it is reasonable for Mr. Trump to think the Fed is pursuing too aggressive a monetary policy and to want people who favor easier policy. But he expressed concern about Mr. Trump’s nomination to the central bank of former campaign adviser Stephen Moore and former GOP presidential candidate Herman Cain.
“What I worry about with Cain and
Moore,” he said, is that their stance on monetary policy could be different if a Democrat were president right now.
Mr. Moore favored tighter monetary policy when Barack Obama, a Democrat, was president. He now says policy should be easier, and he has said that Mr. Trump’s re-election prospects could be threatened if the economy weakens.
Mr. Moore’s shifting views “could be interpreted as wanting to defeat Democrats when they’re in office and elect Republicans when they’re in office,” Mr. Kocherlakota said. “Over the longer haul if presidents fall into the rhythm of choosing Fed appointments with this thinking, that’s not a good outcome at all.”
Mr. Moore said in an email Sunday that he opposed lower interest rates when George W. Bush, a Republican, was president, which “blows up this theory that I’m for rate hikes when [Democrats] are in office and against them when [Republicans] are in office.”
Mr. Moore said he opposed the Fed’s efforts to stimulate growth earlier this decade because “the Fed can’t counteract bad real economic policy,” such as the 2009 fiscal stimulus bill and 2010 financial-regulatory overhaul pursued by Mr. Obama.
Mr. Cain and a White House spokesman didn’t respond to a request for comment. Mr. Cain’s supporters highlight the former restaurant executive’s business background as a qualification for a Fed post. Mr. Moore’s backers have said the economics commentator would bring fresh thinking to the central bank.
Mr. Trump’s picks haven’t caused heartburn in the stock and bond markets. Fed nominations are subject to Senate approval and the White House hasn’t formally submitted Mr. Cain nor Mr. Moore to the chamber.
Mr. Cain has contended with allegations of sexually harassing women, which he has denied.
He faces little prospect of Senate approval, Senate Republicans said. White House officials have sought to temper expectations that Mr. Cain would be formally nominated.
Mr. Moore’s Senate chances are unclear.
In the near term, one or two outspoken critics of Fed Chairman Jerome Powell would be unlikely to change the direction of policy unless they could use data and analysis to convince others on the rate-setting Federal Open Market Committee, which comprises up to seven presidentially appointed governors and five independently selected reserve bank presidents.
“Individuals sitting around that table who are purely political in their point of view could find it very tough sledding,” said former Fed Chairman Janet Yellen in an interview.
Central bankers are more concerned about the longer run if the Fed were to lose its nonpartisan DNA. Sustained attacks on central banks can fuel the public perception that their officials are responding to political influence even when they are simply seeking to meet their mandate to control inflation, Mr. Draghi said.
Over the past three decades, many democratic countries have insulated their central banks from politics to secure more stable inflation over the long run. This can assure bond investors that governments won’t allow short-run political considerations to juice the economy.
Central bank independence has arguably “contributed to lower mortgage payments for everybody, compared to what I experienced when young,“Bank of Canada Governor Stephen Poloz told reporters Saturday. “That’s a pretty big dividend.”
When the Fed raised rates to guard against a boom-bust growth cycle last year, Mr. Trump called the central bank “crazy.” In December, he privately fumed to his advisers about replacing Mr. Powell, his pick to lead the Fed, people familiar with the matter said at the time. Mr. Trump likes Messrs. Moore and Cain because he thinks they have the interests of his presidency in mind, one person familiar with the White House’s thinking said last week. Fed appointments are the main way for the president to influence monetary policy.
Several central banking officials have taken note of Mr. Trump’s latest picks because they generally regarded his earlier Fed nominees as qualified pragmatists.
While Fed officials haven’t spoken publicly about either of Mr. Trump’s recent picks, former Fed policy makers said they believed Messrs. Cain and Moore both were too openly partisan to be effective in the job.
The Fed has been able to attract a world-class research staff because of its devotion to evaluating policy choices purely on their merits. “If staff come to feel the decisions are being driven by politics and not by what’s best from a policy perspective, we could have bad policy in a lot of different areas... and eventually that will drive away good staff,” said Ms. Yellen.
“In terms of economic competence, the Fed is an example for the whole world,” said former Central Bank of Chile governor José De Gregorio in an interview.
Mr. Trump’s preference for loyalists is also a signal that if he wins re-election next year, he could replace Mr. Powell when his term expires in February 2022 with someone less committed to the Fed’s independence, said former Dallas Fed President Richard Fisher in an interview.
“That is something people should be watching and concerned about,” he said.
Paul Tucker, a former deputy governor at the Bank of England, said in an interview that because the Fed’s credibility has cemented the dollar’s primacy as the global reserve currency, any erosion of that credibility would weaken the dollar’s pre-eminence.
“The stakes are potentially very high in the medium and long run for the United States, and not just the Fed,” he said.