Trump's a one-off in so many ways, but when it comes to presidential interference in Fed policy
ref :- "Trump's Fed broadside puts investors on notice" , The Financial Times, Markets and Investing , and ...
ref :- "Trump's bullying of Fed could turn explosive if recession is the result" , Mark Spindel in The Financial Times, Markets and Investing
It's funny how the mind can play tricks .... The independence of central banks from political influence and their ability to impose monetary policy as they think fit has become such a tenet in the running of leading developed economies that it's easy to think that it was carved in stone a very long time ago. That's why economists throw their hands up in horror when the likes of President Erdogan tries to engineer lower interest rates for the Turkish economy .... that, and the fact that those economists would consider such a policy course little short of barking mad.
Actually, it's surprising how recent central bank independence from politicos really is. The Bank of England was only given its head on the election of Tony Blair (and Gordon Brown) in 1997. In the US, the practice of giving the Federal Reserve a free hand over policy has only really been in place since Bill Clinton was persuaded that the country's economic prospects, and therefore his own political future, would be best served by buttoning his lip. Before that point, and despite the lip-service paid to the ideal of central bank independence, presidents repeatedly felt unable to resist wading into monetary policy.
Former Fed Chair Ben Bernanke may have got some fearful stick from Republicans for keeping rates too low (in their opinion), but as a rule presidents like low rates. They foster economic growth that the president of the time can crow about, while higher rates inflict pain on the electorate even if the circumstances demand them. We tend to think that Mr Trump's recent verbal bullying of the Fed for raising rates is just the "nature of the beast", the type of beast that we've not seen before. But in fact some of his predecessors behaved at least as "poorly" , and rather shockingly on one occasion the bullying went beyond the merely verbal.
President Harry S. Trueman once hauled the entire Fed Open Market Committee (FOMC) into the White House and demanded that they keep rates low. He then lied about the meeting to the media.
President Lyndon Johnson has always had a poor press. That may have something to do with the way he came to power after the assassination of JFK, and certainly had a lot to do with the escalation of US involvement in Vietnam under his watch. Domestically he had his good points however, particularly in the field of civil rights , education and tackling poverty. But not even his fiercest defenders would claim that subtlety was one of his virtues. He was a bruiser, and once summoned Fed Chair William Chesney Martin to his Texas ranch, shoved him up against a wall and ordered him to stop raising rates. Martin, he of "the job of a central bank is to remove the punchbowl just as the party gets going" fame, held his ground for 11 months before starting to ease rates in November 1966. Many consider that to be the first birth pangs of the stagflation that caused such pain in the 1970s .... mind you, Mr Martin did secure his reappointment in 1967.
*** N.B. Stagflation : a toxic cocktail of high inflation, high unemployment and low growth ***
If that was the birth of stagflation, it was nurtured by President Richard Nixon's appointment of the tame Arthur Burns as Martin's successor, who predictably kept rates too low to counter the growing threat. As one might expect, Tricky Dicky has other form to consider : when leaks emerged that he was contemplating stuffing the FOMC with doveish members and revoking the 1951 Accord that assured Fed independence, the bond market went into a tailspin until the rumours were satisfactorily denied.
And that's really the point ..... however interesting you may or may not find the history, it matters a great deal to both markets and ultimately to the economy itself. Most investors would agree (we hope) that between politics and central bank policy there is a line that you should not cross. The trouble is that this president is becoming at least as vocal as some of his predecessors in calling out the Fed for raising rates (well, he's a property developer after all), and let's face it he can hardly see a line without wanting to cross it.
This attempt to politicize the Fed is hugely dangerous. Mark Spindel points out that should the Fed feel the political pressure enough to let it influence policy, it could go one of two ways. It could back down from taking the tough decisions required to contain inflation in a robust economy with low unemployment. Or, in a desire to assert its independence, it could even become too hawkish and raise rates when it is not required. Chairman Powell and his colleagues will need to stand firm in the face of all outside influences, not just the president's.
The Fed argues that with 2nd quarter growth expected to show an annualized rate of 4%, inflation already back on target and such low unemployment , it's current path of gradual tightening is appropriate .... which seems reasonable. When Mr Trump calls for easier policy, he is ignoring not only the current reality but also the certainty that his programme of tax cuts and infrastructure will greatly increase government borrowing and most likely significantly raise the borrowing costs that he wants lowered.
That's not something he is likely to acknowledge. Mr Trump likes to take credit for all the nice things and blame somebody else for all the negatives .... that's just the way he is. So he is already trumpeting how he has fostered 4% growth, but accuses the Fed of jeopardizing it by raising rates. No other factors seem to come into the president's thinking, but the Fed has to take an awful lot more into account and will have to stay true to it's mandate, however vitriolic the tirades from the Oval Office.
That's easy to say but sometimes tough to do..... and what's also worrying is the fact that central bank independence functions best when supported by the politicians of the era who believe in that ideal. It doesn't seem at all likely that such a scenario currently applies ....