Trump Can’t Easily Break the Fed

(Bloomberg Opinion) -- President Donald Trump keeps attacking the Federal Reserve, and has recently moved toward appointing loyalists to the Fed’s governing board. This has sparked fears that he might gain some control over the world’s most powerful central bank, getting it to do his bidding rather than what’s best for the economy in the long term.

Are those fears justified? Although my level of concern has risen, I’m not close to hitting the panic button. 

The Federal Open Market Committee, which sets U.S. monetary policy, is populated overwhelmingly by people who leave politics at the door. If Trump managed to win Senate approval for Stephen Moore and another ally, and if both proved perfectly loyal, they would still have only two of 12 votes on the committee. That’s insufficient to come close to politicizing the Fed’s decisions.

The current committee members agree strongly about the appropriate course of monetary policy. None has publicly dissented from the group’s decisions in the nine meetings such Jerome Powell took over as chairman in February 2018. If the committee were already more fractured, adding members who might dissent would be much more problematic. 

Even then, influence within the committee is not just a matter of numbers. The members with the most expertise — currently Powell, Richard Clarida and John Williams — work most closely with the Fed staff, set the agenda and hence have by far the most say in the setting of monetary policy. Also, because federal sunshine rules require meetings of four or more governors to be made public, typically only two or three governors confer directly to formulate strategy and tactics prior to formal committee and board meetings. Thus, those not included in the core group have less influence.

In short, whoever Trump appoints won’t be central to the policy-making process unless one of them becomes chairman. That’s not likely to happen soon, as Chairman Powell has said he intends to serve out his term, which runs to February 2022. 

All that said, I’m not completely sanguine. The shift in the quality of potential appointees — from Powell and Clarida to Moore and Herman Cain (who recently withdrew his candidacy) — is striking. If more positions on the Fed’s Board of Governors open up, there’s still a chance that more appointees with overtly political agendas could undermine the central bank’s policy making. And if President Trump wins a second term, he will have an opportunity to replace Powell with someone more malleable. Thus, the outcome of the next election could have important consequences for the Fed’s long-term independence. 

Personnel aside, the president’s attacks threaten to undermine confidence in the Fed. For one, his tendency to blame the Fed for poor economic performance could encourage others to do the same. Second, particularly at times when the Fed’s interest-rate decisions are a close call, Trump’s vocal criticism could lead people to believe that the Fed succumbed to his demands. Even if not true, such a perception would cast doubt on the Fed’s integrity.

U.S. presidents have tended to refrain from criticizing the Fed since 1993, when Robert Rubin — then head of President Bill Clinton’s National Economic Council — recognized that doing so had little benefit. It probably wouldn’t change the Fed’s direction, but might shake market confidence in the central bank’s independence. If markets decided that the Fed had a political agenda — for example, goosing the economy ahead of elections — they would become more volatile and long-term borrowing costs would likely rise to offset the risk of higher inflation. This cost would far outweigh any potential benefit from influencing the Fed’s monetary policy decisions.

President Trump has jettisoned such considerations. His desire to have the Fed as a scapegoat appears to outweigh his concern about compromising the central bank’s independence. Ironically, the better Powell and his colleagues do their jobs — the more they are able to resist Trump and maintain markets’ confidence in their independence — the less the president will pay for his regrettable choice to continually criticize the Fed.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Bill Dudley is a senior research scholar at Princeton University’s Center for Economic Policy Studies. He served as president of the Federal Reserve Bank of New York from 2009 to 2018, and as vice chairman of the Federal Open Market Committee. He was previously chief U.S. economist at Goldman Sachs.

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