In the chaos of our current political era, it can be difficult to stay on top of—or even to remember—all of the dangerous statements and policies that Donald Trump issues daily from his perch in the Oval Office. One particularly troubling moment came and went last week, when Trump railed against the nation’s independent central bank, the Federal Reserve, in an attempt to gain political advantage.
Yes, I realize that monetary policy is boring even when it matters most, such as during a recession or a financial crisis. And today, with so many other more immediate matters to worry us—Trump’s affection for and enabling of murderous dictators, Republicans’ ongoing efforts to suppress voting, catastrophic predictions about climate change that Trump and the Republicans refuse to take seriously, and on and on—it can be difficult even to remember highly salient recent events (such as the elevation of a bald-faced liar to the Supreme Court who will help to distort the US legal system for decades to come).
Even so, the Federal Reserve (known among policy wonks as the Fed) is one of the foundations of our economic system, and threats to its independence could lead to catastrophe. That it is Trump who is leading the attacks on the Fed makes it all the more worrisome, because Trump more than any other politician has made it clear that every government employee and agency—including even the Justice Department and law enforcement agencies—owe their loyalty to him rather than to the country. What could go wrong?
Trump’s Worrisome Swipes at the Fed
With the midterm elections only weeks away, Trump and the Republicans have been hoping that the relatively strong (but highly uneven) economy will save them from political ruin. True, the economy has been merely continuing the upward march that President Barack Obama presided over for the last seven years of his presidency (after he was an essential player in preventing a second Great Depression during his first year, when he took stewardship over an economy that George W. Bush’s policies had left in a tailspin).
Even so, Trump believes that he can take credit for everything good that happens, and he has been pushing hard to convince voters that he is an economic genius. Unfortunately for him, he has foolishly used stock prices as evidence of his greatness, which worked fine while stocks were generally rising. When last week saw a huge drop in stock prices, however, Trump panicked and began to look for a scapegoat.
It did not take him long to attack the Fed. As the economics correspondent for The New York Times put it:
President Trump responded to falling stock prices on Thursday by continuing to throw rocks at the Federal Reserve, which he has described as “crazy,” “loco,” “going wild” and “out of control” for slowly raising interest rates against the backdrop of a booming economy.
Even though the Fed has been a convenient foil for presidents since its founding in 1913, The Times noted that “[n]o other modern president has publicly attacked the Fed with such venom or frequency.” Trump yet again breaks long-established norms when he feels threatened.
In fact, this is not Trump’s first foray into Fed-bashing. Over the summer, he announced that he was “not thrilled” with the Fed’s policy agenda and then claimed that it “hurts all that we have done.” His most recent eruption, however, is much more threatening. If he actually continues to try to bully the Fed, this would be bad both in the short term and the long term.
The Fed’s Independence Is Essential to Prosperity
But what is the problem with Trump complaining about the Fed? Presidents try to get Congress to adopt their preferred economic policies all the time (the Republicans’ disastrously regressive 2017 tax bill being only the most recent example). Why should a president leave the Fed alone? Indeed, why does the Fed control monetary policy in the first place?
The answer to that last question is directly answered by Trump’s recent outburst. If monetary policy were under politicians’ direct control, they would have every incentive in the world to use that policy to manipulate the economy before every election. “Vote for me. I brought you prosperity!”
Fair enough, but what is so bad about creating prosperity? That would seem to be exactly what we would want politicians to create, and democracy is designed in large part to allow voters to reward success and punish failure. Whatever else one might think about Trump, what is the problem?
The problem is that short-term economic booms are all too easy to create at the cost of post-election economic disaster. The Fed’s current policy agenda involves slowly increasing interest rates to prevent the economy from overheating, because historically low unemployment rates are signaling that the economy might soon overheat and cause inflation to rise.
To be sure, the Fed can make errors of judgment, and it is known for being excessively cautious. Along with many other economists, I continue to believe that the Fed’s target annual inflation rate of two percent is too low, because (for reasons too technical to describe here) low inflation gives the central bank too little leeway in fighting recessions. A little bit more inflation could actually be a good thing.
But even if I am right, that does not mean that the Fed should lose control over monetary policy. When politicians directly control monetary policy, they do not “nudge” things along in the right direction, and we do not get “a little bit more inflation.” Experience shows that the economy is much more volatile when politicians have too much influence over monetary policy.
And could anyone imagine that Trump would be restrained and judicious in setting monetary policy, especially once he figured out that he could juice up the economy at his own whim? That is the slippery slope that leads to hyper-inflation—which countries like Venezuela, Trump’s go-to example of the evils of socialism, have experienced because of similarly self-preserving politicians.
The Nixon-Trump Connection, Again
As Trump so often does, he again seems to be taking Richard Nixon’s presidency not as a cautionary tale but as a template for how to be an out-of-control chief executive. Trump’s firing of FBI Director James Comey last year (preceded by his summary firing of Acting Attorney General Sally Yates, who refused to enact his cruel Muslim ban) evoked memories of Nixon’s Saturday Night Massacre, one of many low points on the road to Nixon’s resignation.
Nixon similarly went much further than all other presidents before or since (until Trump) in politically manipulating the Fed. He did not need to wrest control of monetary policy by violating the Fed’s political independence in a formal way (changing the Fed’s authorizing legislation, for example). Instead, he installed a Fed Chair who was willing to help Nixon win reelection in 1972 by artificially pumping up the economy.
As an article from this past summer in Bloomberg noted, Nixon
appointed Arthur Burns as chairman in 1970 and then began pressuring him in public and in private. On the day he appointed Burns, Nixon drolly remarked: “I hope that independently he will conclude that my views are the ones that should be followed.”
A year later, the Wall Street Journal reported that Nixon had secured a “commitment” to easy money from Burns.
The economy bounced, Nixon won in a landslide, and then the inevitable price had to be paid. Inflation quadrupled within two years of Nixon’s election. (There were, of course, other factors involved in that inflation spike, most prominently oil prices; but without excessively expansionary monetary policy, even that would have been much less damaging.)
We do not know whether Trump will stop at merely publicly berating the Fed (whose current chair, Jerome Powell, Trump himself appointed). With compliant congressional Republicans in tow, however, Trump might well decide to do bluntly what Nixon did only indirectly: give himself direct control over monetary policy.
This is, therefore, an underappreciated aspect of the midterm elections next month. If Republicans retain control of both houses of Congress, even by one vote, they will be positioned to give Trump whatever he wants. And Trump might include “end the Fed and give me control over monetary policy” on his wish list.
Lingering Distrust of the Fed on the Left and the Right
Would Republicans go along? There is already a great deal of anti-Fed sentiment on the political right. Kentucky Senator Rand Paul (and his congressman father Ron before him) has long argued against Fed independence. In fact, Paul held hearings during the Obama years in which he tried to bully the Fed into adopting policies that would harm Democrats politically.
At the time, Michael Dorf and I published a law review article defending the independence of the Fed, specifically to prevent this kind of political manipulation. There, we pointed out that the usual concern about politicians overstimulating the economy was not the only potential downside of political meddling in monetary policy. Republicans in Congress could have tried to harm any Democrat’s chances of winning in 2016 by using monetary policy to weaken the economy (and then blame it on Obama, saying that the buck stops with the president and his party). That, in fact, seemed to be Paul’s agenda.
Trump’s stance, however, is actually the easiest of cases, the canonical example that argues in favor of Fed independence. He simply wants to open the monetary spigots to make “his” economy stronger. And in 2020, he would want to do it again, even though we would not yet have recovered from the damage that Trump would like to have set in motion this year.
Interestingly, there is also a long tradition of Fed skepticism on the left. When Senator Bernie Sanders’s 2016 presidential campaign started echoing Paul’s “audit the Fed” chants, therefore, Professor Dorf and I published a column calling on Sanders to knock it off.
Although I understand why American progressives believe that the Fed is controlled by banking interests that skew its policies in conservative directions, the alternative would be worse. And as always, Trump is proving how much worse it could be. Giving this impulsive president control over monetary policy would be far more harmful than slightly-slower-than-optimal economic growth over time, which is what people on the left understandably decry.
Shielding the Fed from political interference is thus essential. Trump should not be allowed to destroy yet more norms in his quest to consolidate power. Happily, it appears that Trump’s short attention span has caused him to lose interest in Fed bashing, at least for now.
The Fed’s chair is appointed to a four-year term, and the Fed’s governors serve 14-year terms for a reason. Their response to last week’s attacks was reassuring, with Powell saying: “We don’t consider political factors or things like that. That’s who we are, that’s what we do, and that’s just the way it’s always going to be for us.”
One hopes that they will not be worn down by a series of Trumpian attacks and that Congress will never give the president formal control over monetary policy. The Fed must continue to exist and to stand firm against a loco president.