WASHINGTON – ”To the barricades.” That’s one way to characterize Bill Dudley’s idea that the Federal Reserve fight off President Trump’s attacks. It’s a bad idea, but it also shows the defects of Trump’s policies.
Dudley was head of the New York Federal Reserve Bank and vice chairman of the Federal Open Market Committee from 2009 to 2018. He made his proposal in two columns for Bloomberg Opinion. Fed Chairman Jerome Powell had no knowledge of the first article before it appeared.
In the first column, Dudley correctly argues that Trump’s policies are built on a contradiction. Trump wants the Fed to cut interest rates to spur economic growth and enhance his reelection prospects. Yet his aggressive tariffs have slowed economic growth. The mounting uncertainty raises prices and discourages firms from making new investments. Slowing economic growth then reduces the odds of Trump’s reelection.
If the Fed surrenders to Trump’s bullying on interest rates, Dudley writes, it becomes complicit in his anti-trade policies, particularly involving China. The Fed may inadvertently encourage “the president to escalate the trade war further, increasing the risk of a recession.”
To escape this, Dudley wants the Fed to denounce him. “Officials could state explicitly that the central bank won’t bail out an administration that keeps making bad choices on trade policy.”
What Dudley proposes would change the Fed’s political role – shifting it from a nonpartisan and technocratic institution into a political entity with its own agenda. His proposal would demolish the Fed’s defense of its independence: that it’s necessary to achieve its congressional mandates of “price stability” and “maximum employment.” It would become an economic agency driven by partisan politics.
You can imagine how long what’s left of the Fed’s independence would last. About 10 seconds. Dudley recognizes this but argues it’s inevitable.
“I understand and support Fed officials’ desire to remain apolitical,” he writes. But Trump’s “ongoing attacks on Powell and on the institution have made that untenable.”
He continues: “There’s even an argument that the election itself falls within the Fed’s purview. After all, Trump’s reelection 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. If the goal of monetary policy is to achieve the best long-term economic outcome, then Fed officials should consider how their decisions will affect the political outcome in 2020.”
Given the controversy, Dudley published a second column denying what he clearly had advocated in the first. His proposal simply won’t fly politically – and shouldn’t. Elected officials surrender their explicit powers only when they’re convinced that the loss of these powers makes them politically stronger. The logic is self-evident: Politicians are better off when unpopular decisions are shifted to somebody else. This certainly describes the Fed’s “independence.”
Politicians and economists alike recognize that there are times when the government must adopt unpopular policies for the country’s long-term welfare. In the Fed’s case, this usually involves higher interest rates to preempt financial speculation or undesirable inflation. Few elected officials praise higher interest rates. Indeed, they are happy to criticize the Fed publicly for decisions that, privately, they support.
Dudley’s call to arms is wrong. The Fed’s independence is a messy arrangement full of potential inconsistencies, ambiguities and failures. It’s hard to describe as well as defend. Its main virtue seems to be that it’s better than any likely alternative. The Fed’s best survival strategy is to do what it’s been doing along, which is to use its best judgment to fulfill its congressional mandates. Picking a fight it cannot win against Trump is simply asking for trouble.
Robert Samuelson is a columnist for The Washington Post.