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Even more alarming is Trump's announcement to appoint two poorly-qualified loyalist supporters to fill vacancies on the Federal Reserve Board of Governors Stephen Moore and Herman Cain. Moore, a conservative media commentator, has expressed very conflicting views on the Fed's policy, ranging from opposition to low interest rates post-crisis under the Obama administration to the Trump's criticism of the recent rate hike and tighter monetary policy. of Godfather & # 39; s Pizza, chairman of the board of directors of the Kansas City Fed, the administrators of the Fed's regional banks essentially liaise between the bank and the regional business interests and do not participate in the development of monetary policies and banking regulations.
Some Fed members have argued that one or two votes within the FOMC would have little influence on the evolution of monetary policy. However, like the parable of the frog sitting in a pot of boiling water, if the gradual dismantling of the Federal Reserve's independence continues, this will lead to the political militarization of the country. Institution and at a very bad place for our economy.
The Federal Reserve is now at a crossroads. Political pressure and some signs of economic slowdown have changed the course of Fed policy. If the Fed had been more aggressive in normalizing rates in the aftermath of the Great Recession, as recommended by rules such as the "Taylor rule" that sets the rate of funds according to inflation and inflation. 39, output gap, a break at this point would make more sense.
Economists have long argued that monetary policy works best if the rules are followed rather than by discretion. The stagflation of the 1970s compared to the low inflation of the following decades is a perfect example.
The Federal Open Market Committee advances on a fine line, emphasizing that its policy now depends on data. Of course, the implementation of a well defined and transparent policy rule requires data. However, data dependence can also be interpreted as a total abandonment of the rules in favor of the "constitution of the policy as it goes".
Ending policy normalization while the 2.5% federal funds rate is still historically low and its balance sheet is close to $ 4 trillion, leaving the Federal Reserve and the economy in a position precarious.
If inflation were to exceed the FOMC target, it could require drastic rate hikes that could lead to an economic downturn. And if the predicted economic slowdown were to lead to recession, the Fed would have very little ammunition to ease its monetary policy by lowering its rates or widening its balance sheet.
-By Victor Li, associate professor of economics at the Villanova School of Business. Previously, Li worked with former Fed Chairman, Ben Bernanke, at Princeton University from 1998 to 2000 and at the Federal Reserve as a Visiting Fellow at the Federal Reserve Bank of St. Louis. He was Senior Economist at the Federal Reserve Bank of Atlanta from 2000 to 2001.
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