‘Call to arms’ for the Fed is unwise and inappropriate
That’s one way of characterizing Bill Dudley’s recent proposal that the Federal Reserve fight back against President Trump’s unrelenting attacks. Although it’s a phenomenally bad idea, it has the curious effect of revealing the primary defects of Trump’s economic policies. First, some background. Dudley — a former chief U.S. economist for Goldman Sachs — was head of the New York Federal Reserve Bank and vice chairman of the Federal Open Market Committee (FOMC), the Fed’s main decision-making body, from 2009 to 2018. He made his proposal in two columns for Bloomberg Opinion. According to the Fed, Chairman Jerome Powell had no knowledge of the first article before it appeared.
In the first column (Aug. 27), Dudley correctly argues that Trump’s policies are built on a contradiction.
On the one hand, Trump wants the Fed to cut interest rates to spur economic growth and enhance his reelection prospects. On the other hand, his aggressive tariffs have arguably slowed economic growth. The mounting uncertainty raises prices and discourages firms from making new investments. Slowing economic growth then reduces the odds of Trump’s reelection.
The Fed is thrust into an awkward position, Dudley writes. If it surrenders to Trump’s bullying on interest rates, it becomes complicit in his anti-trade policies, particularly involving China. Worse, the Fed may inadvertently encourage “the president to escalate the trade war further, increasing the risk of a recession.”
To escape this dilemma, Dudley wants the Fed to denounce Trump. “Officials could state explicitly that the central bank won’t bail out an administration that keeps making bad choices on trade policy, making it abundantly clear that Trump will own the consequences of his actions.” Whoa! What Dudley proposes would dramatically change the Fed’s political role — shifting it from a nonpartisan and technocratic institution, deciding when and how much to ease or restrict money or credit, into an overtly political entity with its own political agenda.
His proposal would demolish the Fed’s standard defense of its “independence”: that it’s necessary to achieve its congressional mandates of “price stability” and “maximum employment.”
He continues: “There’s even an argument that the election itself falls within the Fed’s purview. After all, Trump’s reelection arguably presents a threat to the U.S. and global economy, to the Fed’s independence and its ability to achieve its employment and inflation objectives. If the goal of monetary policy is to achieve the best long-term economic outcome, then Fed officials should consider how their decisions will affect the political outcome in 2020.” Whoa! Given the resulting controversy, Dudley published a second column (Sept. 4) denying what he clearly had advocated in the first. His proposal simply won’t fly politically — and shouldn’t.
Politicians and economists alike recognize that there are times when the government must adopt unpopular policies for the country’s long-term welfare. In the Fed’s case, this usually involves higher interest rates to preempt financial speculation or undesirable inflation. Few elected officials praise higher interest rates. Indeed, they are happy to criticize the Fed publicly for decisions that, privately, they support.
Dudley’s call to arms is over the top. The Fed’s vaunted “independence” is a messy arrangement full of potential inconsistencies, ambiguities and failures. It’s hard to describe as well as defend. Its main virtue seems to be that it’s better than any likely alternative. The Fed’s best survival strategy is to do what it’s been doing along, which is to use its best judgment to fulfill its congressional mandates. Picking a fight it cannot win against Trump is simply asking for trouble.