Ex-Fed Official Dudley’s Call to Block Trump Draws Criticism
A former top Federal Reserve official suggested the central bank reject interest-rate cuts that would help Donald Trump’s 2020 reelection prospects, drawing swift criticism that such an approach would jeopardize the independence of a Fed already under fierce attack from the U.S. president.
The Bloomberg Opinion column by former New York Fed President Bill Dudley, published Tuesday, argued the central bank risks enabling further escalation by the president in the trade war with China and officials should state explicitly that they “won’t bail out an administration that keeps making bad choices on trade policy.”
“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,” wrote Dudley, who headed the New York Fed from 2009 to 2018 and was previously a Goldman Sachs Group Inc. economist. “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.”
The Fed rejected the suggestion that it would play politics with monetary policy.
“The Federal Reserve’s policy decisions are guided solely by its congressional mandate to maintain price stability and maximum employment. Political considerations play absolutely no role,” Fed spokeswoman Michelle Smith said in an emailed statement.
Pushback from analysts and economists also came thick and fast.
“Bill Dudley’s remarks are not only misguided but also dangerous coming from a former top Fed official,” said Gregory Daco, chief U.S. economist at Oxford Economics. “The Fed doesn’t have the luxury to stand idle in the face of a slowing economy.”
Jared Bernstein, who served as former Vice President Joe Biden’s chief economist, posted on Twitter that to “do what Dudley suggests compromises the Fed’s independence. Also, it could easily backfire as Trump often doubles down when challenged.”
Fed Chairman Jerome Powell and his colleagues have been careful to not criticize the president’s trade policy choices, and they insist that their decisions are blind to politics.
But they have made clear that the uncertainty being created by the escalating dispute with China, plus Trump’s on-again-off-again threat of tariffs against Mexico, and allies in Europe and Japan, were dampening U.S. business investment and had cooled global growth.
Powell, in a speech Friday in Jackson Hole, Wyoming, signaled the Fed was open to cutting interest rates again next month to help offset the headwinds from a cooling world economy, while cautioning that that there are “no recent precedents to guide any policy response to the current situation.”
Dudley’s suggestion “would be the fastest way to get stuck in the political fray,” Megan Greene, a senior fellow at Harvard’s Kennedy School of Government, said in an interview on Bloomberg Radio. “I think it’s worth pointing out that there’s not a whole lot of water between the Republicans and the Democrats on trade, actually.”
Neil Dutta, head of economics at Renaissance Macro Research, agreed with that in a note to clients titled “Dudley Deep State,” writing that “the Fed cannot be seen as picking sides.”
Trump has relentlessly assaulted the central bank for raising interest rates last year and not cutting them fast enough for his liking. He stepped that up a notch on Friday, calling Powell an “enemy” of the U.S. on a par with China’s leader -- an unprecedented public accusation from a U.S. president about someone he picked for the job . Treasury Secretary Steven Mnuchin tried to walk that back on Sunday, saying the president didn’t mean it literally.
Dudley’s comments on the Fed not enabling Trump’s trade war articulate a sentiment that’s been growing since the president announced additional tariffs against China on Aug. 1, one day after the Fed cut interest rates for the first time in more than a decade.
Dudley “is dead right” that the Fed shouldn’t cushion trade impacts, said Roberto Perli, a partner at Cornerstone Macro LLC. “The risks to the outlook that are quite evident right now have nothing to do with interest rates being too high and a lot to do with trade tensions and unprecedented policy randomness depressing household and business confidence.”
At the same time, Perli added that political thrust of Dudley’s column was an “extreme and probably unwise view because it definitely would politicize the Fed forever.”
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