WSJ: Fed Rejects Call to Consider Politics in Policy Decisions

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Fed Rejects Call to Consider Politics in Policy Decisions

Former official says central bank should consider thwarting Trump’s re-election, sparking blowback


The Federal Reserve said it rejected political considerations in its policy-making after one of its former top officials called for the central bank to consider the economic risks of President Trump’s re-election when setting interest rates.

Former New York Fed president William Dudley, in an article published Tuesday by Bloomberg Opinion, urged the central bank to reconsider its apolitical approach because, by cutting interest rates, it is enabling Mr. Trump to escalate trade wars that are harming the economy.

His suggestions, which stunned economists and other Fed officials, would mark a significant departure from the central bank’s practice of ignoring partisan politics when setting policy.

Fed officials quickly dismissed the recommendations in the column. “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,” said Michelle Smith, a Fed spokeswoman.

Given Mr. Trump’s trade disputes are hurting the economic outlook, “the central bank’s efforts to cushion the blow might not be merely ineffectual. They might actually make things worse,” said Mr. Dudley, who as New York Fed president served as vice chairman of the rate-setting Federal Open Market Committee from 2009 until mid-2018.

Mr. Dudley said the Fed should consider political factors in making its decisions. “After all, Trump’s re-election arguably presents a threat to the U.S. and global economy, to the Fed’s independence and its ability to achieve its employment and inflation objectives,” Mr. Dudley wrote.

The White House declined to comment. Separately, Mr. Trump continued his attack on the central bank Tuesday by blaming the Fed for recent weakness in manufacturing. “Our Fed has been calling it wrong for too long,” he said on Twitter.

Fed officials cut interest rates last month for the first time in a decade, citing risks that included slower global growth, trade policy uncertainty and muted inflation.

Fed Chairman Jerome Powell has indicated in public and in private that the central bank must avoid political considerations when making policy decisions. He has tried to avoid providing the kind of fuel that might add to the political fire menacing the central bank. 

Instead, Mr. Powell has said that Fed officials must focus exclusively on how best to meet their congressional mandate if they are to defend the institution’s independence to set policy without political interference. 

Mr. Trump’s attacks on the Fed have made Mr. Powell’s apolitical stance untenable, wrote Mr. Dudley, who before joining the New York Fed was chief economist at Goldman Sachs. He declined to comment for this article.

Mr. Dudley is a registered Democrat, according to public records, and he donated to Democratic candidates before his service at the central bank.

His argument suggests that there are times when the central bank should not attempt to meet its mandate in the short-run in order to achieve it in the long run, and that this is one of those times.

While Fed officials say they don’t let politics influence their policy decisions, this line can blur when they confront how elected officials’ policy choices will influence the economic outlook.

In November 2010, for example, as the Fed launched a new bond-buying stimulus program, then-Fed governor Kevin Warsh said the central bank should not provide more monetary stimulus until Congress and the White House did more to shore up the economy with fiscal policy.

“We are too accepting of dangerous policies from others that have been long in the making, and we should put the burden on them,” he said at the Fed’s policy meeting, according to a transcript. “I think we would be far better off waiting.”

Several economic analysts and former Fed officials said Tuesday that they were stunned by Mr. Dudley’s argument. While some of them agreed that Mr. Trump’s policies are harming the economy and that his attacks on the Fed are undermining economic policy-making, they said it would be treacherous for the Fed to interfere in the democratic process by exercising its own judgment over that of elected officials.

Taking electoral politics into account when setting interest rates is “categorically beyond the pale of legitimate technocratic central banking regardless of the risks posed by a given political outcome,” said Krishna Guha, vice chairman of Evercore ISI and a former adviser at the New York Fed to Mr. Dudley.

Mr. Dudley’s argument would be to withhold potential medicine out of a belief that this could cure the disease, said Jared Bernstein, an economist who served in the Obama administration.

“It’s dangerous to the institution and the economy because it won’t work,” he said. If the Fed followed Mr. Dudley’s advice, “there is no guarantee with Trump that he wouldn’t just double down,” further harming the economy.

The Fed’s relative independence in monetary policy has gone hand-in-hand with its apolitical approach to policy, and if it rejects the latter, it will cede the former, said Daniel Clifton, head of policy research at Strategas Research Partners.

“If the Fed is perceived as trying to hurt Trump’s reelection, it is going to set back the independence the Fed has achieved for so long,” said Mr. Clifton.

Mr. Clifton recalled how the central bank, facing rising worries about the economy and with Mr. Dudley in a top leadership post, launched an aggressive stimulus campaign in Sept. 2012, several weeks before President Obama’s reelection.

“The Fed responded overwhelmingly and things got better,” Mr. Clifton said. Republicans were critical of those actions, but the Fed could credibly argue that politics didn’t enter into the decision.