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Politicians have had strong opinions about what the Federal Reserve should do and not do throughout its 105-year history.
They demanded lower interest rates and a money facility, or a particular policy on banking regulation or consumer protection. They summoned Fed leaders at the White House or Congress to convince and cajole.
In this sense, there is nothing new in President Trump's aggressive approach to the Fed. This week he called for lower interest rates and further quantitative easing, and announced his intention to appoint two vocal supporters, Stephen Moore and Herman Cain, to the Board of Governors.
Which makes Mr. Trump's approach to the Fed so unusual Has he repeatedly, publicly undermined the Fed chief he named (Jerome Powell), and, if he succeeded, he would put two officials with experience of the partisan politics in the sanctuary of Fed politics. (Mr. Moore founded the Club for Growth, which supports Conservative candidates, and Mr. Cain went to the presidency.)
"It's more overtly political than anything we've seen since at least the 1980s and, historically, when we've had political appointments and the interventions in the Fed, there have been unintended consequences that last, "said Julia Coronado, president of MacroPolicy Perspectives and former employee of the Fed. "It may be appropriate in the short term, but what is good for the year or the next two years may not be good for the next decade."
All persons appointed by the Chair to the Fed's Board of Governors present their own political views, which generally correspond to the chair who appointed them. But they have generally provided deep technical expertise and a propensity to keep the political dimensions out of the Fed's debate.
"The people around the table had political views, and so did I," said Alan Blinder, who was named vice president of the Fed by President Bill Clinton, and who recently wrote the "Advice and Dissent," "on the role of politicians against technocrats in shaping politics. "But you were not supposed to bring them into the room when it was time to make a decision, and people did not do it."
This is the tradition that Mr. Trump's approach endangers.
You can read thousands of pages of transcripts of Fed meetings in camera without seeing any reference to the political jockey who occupies the rest of Washington.
Three times in recent decades, a president has reappointed a president of the Fed first appointed by a president of the opposing party (Ronald Reagan with Paul Volcker, Clinton with Alan Greenspan and Barack Obama with Ben Bernanke).
You will not see any political stickers in the underground car park. When Dan Tarullo, a veteran of the Obama campaign and a banking expert, was appointed governor in 2009, he first left his mark on the staff who left his vignette.
In fact, the risk is that the Fed will become another partisan battlefield, as is often the case with the Supreme Court appointment process, congressional intelligence oversight committees, and regulators such as the Federal Communications Commission. .
In the immediate future, this would probably not have much effect on policies. If they are appointed and confirmed, MM. Moore and Cain will have two of the 12 votes on the Federal Open Market Committee. Their ability to influence the Fed in favor of Mr. Trump's desired interest rate cuts and a new round of quantitative easing would depend on their ability to persuade their new colleagues.
"It will be their job to convince others that their monetary policy thinking will enhance the Fed's ability to comply with its legislative mandates of maximum employment and stable prices," said former Don Kohn. Vice President of the Fed appointed by George W. Bush. "This will require sound economic analysis supported by research."
The risk of more obvious political divisions within the Fed would materialize over time if the Fed ended up being seen as basing its decisions on the political impulses of the appointees. rather than on a sound economic analysis.
The role of the United States as a global reserve currency – reflected in still low interest rates and a low fear of capital flight – is largely due to the credibility accumulated by the Fed during decades.
During the global financial crisis and its aftermath, for example, the Fed may feel comfortable continuing its efforts to stimulate the US economy without a loss of faith in dollars and treasury bonds by global investors. In fact, the dollar appreciated against other currencies even as the economy was in free fall at the end of 2008 and the Fed had poured billions of dollars into unconventional programs to try to end to the crisis.
The experience of the early 1970s clearly highlighted the dangers of a more politicized Fed. Richard Nixon used both political pressure and sneaky tactics to try to push Fed Chairman Arthur Burns to keep interest rates low in anticipation of the 1972 election.
Among other things, the White House fled a false story that Mr. Burns asked for a major pay raise at a time when the Fed was pressuring employers so that they would not raise wages to fight inflation.
Burns and the Fed followed the wishes of the president and Mr. Nixon was easily re-elected in 1972, in a booming economy. But it was during these years that inflationary pressures accumulated in the economy, and in a few years, the inflation rate reached a double-digit rate.
No one will say that the Fed is separate from politics. It constantly makes decisions that set workers' interests against the owners of capital and those of banks to those of consumers. But there is a difference between recognizing that there are choices that must be based on political values and putting these values before often very technical discussions.
In Senate confirmation hearings, Would Mr. Moore and Mr. Cain adopt the cautious and cautious language typical of central bankers – or assume the role of partisan warriors?
The surest bet is for investors around the world to be alert to the signs of the politicization of the Fed of tomorrow.
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