How Trump’s Attacks on Powell Are Helping the Fed

(Bloomberg Opinion) -- President Donald Trump’s criticisms of the U.S. Federal Reserve and its chairman are becoming ever more bold and strident. After calling the Fed’s monetary policy “crazy” a few weeks ago, this week he told the Wall Street Journal that Jerome Powell “almost looks like he’s happy raising interest rates” and said that “maybe” he regrets choosing him as Fed chairman.

There’s no getting around the recklessness of Trump’s comments. But so far, he has not acted on them. This combination — unconventional rhetoric plus conventional actions — actually strengthens the Fed’s independence.

Until now, this notion of independence has been based on a sort of vague reverence for the Fed in general and the Fed chairman in particular. The president clearly does not have that reverence. But Powell will have the chance, unlike his predecessors, to make a show of the Fed’s independence — precisely because Trump is publicly questioning it.

It’s important to note that, like other economists around the world, I support the principle of central-bank independence. In fact it’s worth briefly explaining why this hard-won independence is so important.

Authoritarian leaders on both the left and the right tend to want their central banks to print more money. In the short run, easy money and the accompanying low interest rates boost the economy and can cover up all manner of economic policy mistakes. Over time, however, to keep the economy growing, bigger and bigger doses of easy money must be administered. The inevitable result: out-of-control inflation and the potential of sudden economic collapse.

For a contemporary view of how this story ends, see Venezuela and Turkey. Yet the basic outline is not unknown in the U.S. The increase in inflation of the 1970s has been attributed in part to a dubious relationship between President Richard Nixon and Fed Chairman Arthur Burns. It took Chairman Paul Volcker’s bitter medicine of high interest rates during the early 1980s, supported by President Ronald Reagan, to tame that inflation.

In the three decades since, presidents and Fed chairmen have largely honored the practice of not commenting on each other’s policies. Then came Donald Trump.

And as unhelpful as the president’s comments have been, they are mild compared to those of some of his advisers. Just last week, the president’s former campaign manager, Corey Lewandowski, wrote that the Fed is a “rogue agency” that sees itself as “wholly independent of any control by the executive branch.”

Yes — that’s the whole idea. Trump himself seems to realize this, in deed if not in word. Powell, remember — the very target of Trump’s ire and an utterly conventional central banker — was also Trump’s choice. And Trump’s latest two nominations to the Fed board of governors, Marvin Goodfriend and Nellie Liang, are not only conventional but favor policies that Trump and the Republicans oppose — namely, higher interest rates and stringent banking regulations.

With the Fed as with so much else, Trump is setting a new norm: The president and the chairman of the Federal Reserve can openly disagree without implying that the president is going to take action against either the chairman or the Fed. So long as the Fed keeps steering its own path, it will be illustrating its own independence, instead of simply asserting it.

All presidents want a strong economy, and it almost goes without saying that they would prefer the Fed to stimulate the economy under their watch, particularly when it’s close to an election. The difference is that Trump admits it. This transparency is healthy. When coupled with strong leadership like Powell’s, it puts the underlying independence of the Fed on a sturdy foundation.

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

Karl W. Smith is a senior fellow at the Niskanen Center and founder of the blog Modeled Behavior.

©2018 Bloomberg L.P.