What Is the White House Whispering to the Fed?

(Bloomberg Opinion) -- President Donald Trump has recently taken an aggressive stance toward the Federal Reserve, publicly criticizing it for choking off growth by setting interest rates too high. Together with remarks made by other administration officials, this raises a troubling possibility: that the White House could pressure the central bank into taking actions that would lead to unduly high inflation. 

To protect the country against this risk, the Fed needs to be more transparent.

Public pressure of the kind Trump has displayed is actually pretty common. True, the past three presidents and their teams maintained silence about monetary policy. But Ronald Reagan certainly did not. And Congress has never held back: High-ranking Republicans urged Chairman Ben Bernanke to adopt more monetary restraint in 2011, even though the unemployment rate was well over 8 percent. 

The good news is that the Fed has largely been successful in ignoring public pressure from elected officials (Bernanke’s Fed, for example, bought a lot more Treasury securities after the Republican appeal). I expect that it will be again.

That said, the Fed has not been impervious. In the late 1960s, it bowed to the White House’s demands and pushed the unemployment rate down to the lowest level in 15 years — a policy that resulted in double-digit inflation. But the decisive messaging wasn’t public. The pressure came via private communications between the executive branch (including Presidents Johnson and Nixon) and the relevant Fed chiefs.

How can we prevent a recurrence of this institutional breakdown? One solution is to make more communication public — an area where the Fed has made a lot of progress over the past fifty years. The central bank, for example, keeps a public record of all Chairman Powell’s meetings. Thanks to that record, we know that Powell meets regularly with both Treasury Secretary Steven Mnuchin and Larry Kudlow, the director of the National Economic Council. 

Problem is, the record doesn’t tell us what Mnuchin, Kudlow and Powell discuss at their meetings. Are the administration officials leaning on the chairman to ease monetary policy? We don’t know, and we should. Specifically, a transcript or audio record of these interactions should be made available to the public and to Congress (possibly with a time lag). 

This isn’t a new idea. Congressional Republicans made a similar recommendation three years ago. Its adoption would be the best way to protect the public — and the Fed itself — against the risk that the executive branch will lead the country into a new “Great Inflation.”

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

Narayana Kocherlakota is a Bloomberg Opinion columnist. He is a professor of economics at the University of Rochester and was president of the Federal Reserve Bank of Minneapolis from 2009 to 2015.

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