As “Hamilton” fans know, controversy has long accompanied America’s national bank. But for decades, presidents from both parties have generally respected the work — and independence — of the Federal Reserve.
But like so much during President Donald Trump’s tenure, that has changed.
Trump has repeatedly tweeted his disapproval of, if not disdain for, Jerome Powell, the Fed chair he nominated and whom the U.S. Senate confirmed.
Trump, responding to volatility in equity markets, has been inequitable in placing blame. “The only problem our economy has is the Fed,” Trump tweeted on Christmas Eve. “They don’t have a feel for the Market, they don’t understand necessary Trade Wars or Strong Dollars or even Democrat Shutdowns over Borders. The Fed is like a powerful golfer who can’t score because he has no touch — he can’t putt!”
On other occasions, Trump has lashed out with words like “loco,” “crazy” and “out of control” in response to the Fed’s steady hike in interest rates.
Actually, the Fed has been in control of inflation for years, which is a “remarkable accomplishment,” Christopher Phelan, chair of the Department of Economics at the University of Minnesota, told an editorial writer. In fact, after the stultifying stagflation of the 1970s, “they’ve been doing extremely well” with low and relatively unvarying annual inflation rates, said Phelan, who is also a consultant to the Federal Reserve Bank of Minneapolis.
Stable inflation and low unemployment are the Fed’s dual mandates, and the relatively low levels of both attest to the central bank’s success.
This is due in no small part to the Fed’s independence. Countries without this system can often find the money supply tied to political, not economic, dynamics, and the result can be poorly performing economies and high (and at times even hyper) inflation. “Countries with independent central banks have a much better track record of favorable inflation outcomes than countries with less independent central banks, because the temptation to print money to pay the government’s bills is just too great,” Phelan said.
While many may be unhappy with specific policy decisions, most lawmakers from both parties are unified that the Fed shouldn’t respond to political pressure. Trump’s boundaries aren’t so sacrosanct. He has reportedly asked aides if he can fire Powell. While the answer is legally unclear, it’s politically and economically loco, to use the president’s words, to even consider it. Investors seem to agree. Markets only began to claw back this week after administration officials said Trump would back off.
Beyond this reassurance, the president should look at his own market-rattling policies and rhetoric — including some of the very factors Trump’s tweet tantrum listed. Citing an analysis of earnings calls and investor conferences published by Sentieo, a financial research platform, the Financial Times reported that “rising anxiety about [President] Donald Trump’s trade policy has overtaken discussion of the historic tax reform in recent months.”
Uncertainties including the government shutdown — and a politically volatile 2019 with Democrats taking control of the House and the looming Mueller investigation — may be playing a part, too. Other factors, including international issues such as Brexit, are likely weighing on Wall Street, as well.
The Fed’s independence is especially important during volatile political times.
As for Powell, he should use the same sensible caution he uses evaluating economic conditions in considering reports of a proposed presidential meeting, lest what he says be misinterpreted or mischaracterized by Trump.
Or, in “Hamilton” parlance, be wary about what’s discussed in and what’s communicated after conversations in “the room where it happens.”