[ad_1]
When the appointments of Herman Cain and Stephen Moore were announced by the White House, the charges immediately multiplied. The Federal Reserve is supposed to be independent and these appointments have been perceived as partisan. But instant critics have bypbaded the most critical question: do they really matter?
No, they do not do it.
The politicization of the US Federal Reserve poses problems. Monetary policy control is a powerful tool to give up. The Fed is often criticized for causing recessions by raising rates too much so that the economy can manage its growth rate. The Fed has also taken extraordinary steps to stabilize the economy by buying government bonds and keeping rates close to 0% for nearly a decade. There are good reasons for the Fed to be created to be independent of politicians. One also understands why there is anguish when the appointees are – at least – politically oblique.
President Trump does not have a positive view of the Fed's decisions in 2018, and his most recent Fed candidates share this view. It should be noted that Stephen Moore said – downright – that the Fed should immediately cut rates by 0.5%. It's a sentiment shared by Larry Kudlow, President Trump's economic advisor. In addition, placing Cain in the camp to want a 0.5% rate cut is not a big step forward.
In addition to concerns about the independence of the Fed, the references of both have also been questioned. Once confirmed, both would sit on the Monetary Policy Committee and still have one vote as members of the Board of Governors. But whether the appointments are political or duly accredited, the question of Moore and Cain's potential effect on monetary policy remains.
How their influence could affect the results of monetary policy is extremely limited. The main transmission is through forward-looking guidelines – the Fed's communication policy regarding its evolution. This includes the famous "dot chart" where members of the Federal Open Market Committee (FOMC) provide their individual perspectives for the fed funds rate over several years and over the longer term. In addition, members use speeches to guide.
To understand how small they will be, the point chart is the best place to start. Currently, the Fed's point chart shows that the FOMC median does not expect any rate hikes this year and one in 2020. Assuming that Moore and Cain would put their rate of 0.5% below the current federal funds rate at 1.875%, there is not change the placement of the midpoint to any time horizon (which makes sense). The average point is less than about 0.1%. In other words, the plot of points does not really interest Moore and Cain.
And while the Moore and Cain points would be 0.5% lower than the current rate and 0.75% below the 2020 median, they would not be the only ones to be outliers. There is always a point waiting for four hikes by the end of 2020 and two points indicate a wait for three hikes. Moore and Cain would certainly be outliers, but they are not the only ones to be a little vigilant. Simply, there is little or no change since adding their points to the Fed's forward-looking forecasts.
However, the impact Moore and Cain would have had less obvious consequences. Moore and Cain are likely to protest the FOMC's advice by dissociating themselves from monetary policy decisions. They could also make speeches against future increases and advocate for rate reductions. They will definitely have an audience because, after all, they will have a vote on monetary policy. But their opinions and comments are unlikely to attract much attention from other members. Moore and Caine will simply not bear the gravity and influence of the most serious members. Wall Street and global investors are likely to view their dissension as a vote of confidence in the agreed monetary policy – not as a sign of serious potential problems. There will be a lot of noise, but very little signal.
Assuming that Moore and Cain are confirmed, the Fed will survive this crisis of partisanship. Strangely, the challenge to the Fed's independence could boost confidence in its monetary policies by showing its resilience to political interests. Maybe Moore and Cain are exactly what the Fed needs to regain public trust and show that it is truly independent. Who knows? What matters in this debate is that Moore and Cain do not matter and monetary policy will not really be affected by their appointments.
Samuel E. Rines is the chief economist at Avalon Advisors in Houston, Texas.
Image: Reuters
Source link
