Why appoint Herman Cain and Stephen Moore to the Federal Reserve could have dangerous consequences

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The US central bank has proved that it was not afraid to curb the economy to avoid runaway inflation, even though elections were looming around the corner. This experience creates stability in world markets and gives investor confidence.

Trump's companies view Trump's initiatives as an attempt to politicize an institution that, to be successful, must be considered and remain apolitical. And that has consequences, potentially serious.

"The Fed is not a place to put your buddies," CNN Business former Federal Reserve Governor Sarah Bloom Raskin told CNN Business.

Raskin, who was appointed by President Barack Obama and He sat on the Fed's board of directors from 2010 to 2014, saying that Trump's attacks on the central bank and Moore's and Cain's selections "may politicize the Fed."

"When you undermine the credibility of the Fed, you reduce the effectiveness of an important way to generate economic prosperity," she said.

Former Trump campaign advisor, Stephen Moore (left), recently called on the Fed to immediately reduce interest rates. Herman Cain (right) had already asked the United States to return to the gold standard.

"More suited to being talk show hosts"

Trump again complained to the Fed on Friday and urged him to cut interest rates to accelerate economic growth.

"I think they've really slowed us down," Trump told the press.

David Kotok, co-founder and chairman of Cumberland Advisors, worries that the Fed's reputation on the world stage will be badly damaged.

"It's politicizing the Fed, it's doing it in a way that divides and destroys," Kotok said. "I am very worried about Trump's rhetoric and the Fed's bashing."

The White House declined to comment.

Trump, noted Kotok, is not the first president to criticize the Fed. President George H. W. Bush, for example, spoke to the Fed about rising rates.

At the beginning of his term, Trump selected traditional personalities to join the Fed, much to the relief of Wall Street. Trump has raised the highly respected Governor Jerome Powell to President. He named Richard Clarida, an economist at Pimco, and Vice President of Supervision, Randal Quarles. And Trump has appointed Kansas banking commissioner Michelle Bowman as governor.

But the Fed's latest picks by Trump have shifted directly into the political arena, just as its attacks on central bank policy have intensified.

"It's moving from the appointment of boring and competent people to people who are better at conducting talk shows than central bankers," said David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution. "They say things that do not make sense."

Remember the 9-9-9 plan?

A few days after his name was announced, Moore, a former CNN analyst and Trump campaign advisor, called on the central bank to immediately reduce interest rates. Former Fed officials have warned that this decision would be radical and counterproductive.

"Editorialising for a rate cut as a presumed candidate is unthinkable behavior," said Kotok.

And Cain, the former CEO of Godfather's Pizza, believes that the United States should return to the gold standard. As a presidential candidate in 2012, Cain surprised many with his 9-9-9 plan, which included a 9% income tax, a business tax and a 9% retail sales tax.
Why click on the panic button of the Fed? would be a bad idea for the economy

"He has bizarre economic opinions, anything that has happened between nine and nine years has not come to fruition," said Wessel, correspondent for the Wall Street Journal.

Cain has experience in the business world and even worked at the Fed. Previously, he was president of the Kansas City Federal Reserve.

"Cain passed my test," said Kotok.

But even some Republicans have expressed skepticism about the opportunity to add Cain to the Fed.

"If Herman Cain was part of the Fed, you would know that the interest rate would soon be 9-9-9," Utah senator Mitt Romney told Politico on Thursday. Romney added that he doubts that Cain will eventually be named.

Neither Moore nor Cain responded to requests for comment.

Dissenting voices

Moore and Cain have changed their views on the Fed's policy to align them more closely with those of Trump, according to Barclays chief US economist, Michael Gapen.

"These" easy money "policies contrast with the" hard money "views expressed by both countries in recent years," wrote Gapen in a report titled "The Fed's Politicization Begins" .

Of course, Moore and Cain would only be two votes in a 19-member committee. Their voices would probably be heard by the more traditional choices.

Wall Street Journal: Trump told the Fed president that I'm stuck with you.

This means that even if Moore and Cain reach the Fed, they might not be able to influence the actions of the central bank.

However, Raskin, the former Fed governor, warned that it was rare to have several dissenting votes. Such disagreement can confuse investors by weakening the central bank's message.

The bond market revolt would affect the economy

Trump's attacks on the Fed could be a political tactic of the White House. If the economy slows in the run-up to the 2020 election or if markets are plummeting, Trump can simply blame an institution that does not want to retaliate: the Federal Reserve.

"The underlying economy is not as strong as one might think," Raskin said. "If he's insightful enough to look beyond the markets, then I think he could very well see that he needs a guy who makes the fall. And that could very well be the Fed. "

But that could turn around economically.

If investors worry that the Fed does not have the "backbone" to fight inflation by raising rates, long-term rates will rise higher than they would otherwise, Wessel said. .

This would increase the cost of borrowing everything from mortgages to auto loans – and slow down the economy and the stock market.

"There is a price to pay to weaken the credibility of the Federal Reserve," said Wessel.

Trump's attacks on the Fed could be a smart short-term political strategy. But in the long run, they could end up hurting Trump where it hurts the most: the economy.

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