President Donald Trump hailed his appointment of Jerome Powell to be the next Federal Reserve chair, citing Powell’s “considerable talent and experience.” Given the realistic alternatives, Powell was one of Trump’s better appointments.
If the economy goes south in the next three years, however, Trump’s tune will change. He’d surely lash out at Powell and the Fed with vitriol. Going well beyond legitimate criticism, he has already assailed U.S. intelligence agencies, the judicial system and the Congressional Budget Office. During the 2016 presidential campaign, he leveled phony charges of interest-rate manipulation against Fed Chair Janet Yellen.
By statute, the Federal Reserve is an independent agency, a structure designed to let it manage monetary policy without political interference with its operations or economic judgments. It’s subject to congressional oversight.
Trump will get a chance to name a Fed vice chair by year’s end to replace Stanley Fischer. Ideally this job should go to a prominent economist who’d work well with the new chair.
Powell, a law-school graduate, isn’t a professional economist like his predecessors Volcker, Alan Greenspan, Ben Bernanke and Yellen. But the former private equity executive and Treasury official understands markets and has won the respect of influential Fed staffers. A Republican who was named to the Fed by President Barack Obama, he is expected to follow the policies of Yellen, with whom he has developed a good relationship.
Most presidents have respected the Fed’s nonpartisan autonomy. Ronald Reagan, Bill Clinton and Barack Obama all reappointed sitting chairmen who weren’t members of their parties.
There have been tensions. In 1992, President George H.W. Bush blamed Greenspan for his second-term defeat. Budget Director Richard Darman and Treasury Secretary Nick Brady accused Greenspan of failing to stimulate economic growth. Looking back, their case looks weak. The economy grew at a robust 3.6 percent annual rate in 1992.
The historical example cited and feared by Fed-watchers is President Richard Nixon’s choice of a confidant, the eminent economist Arthur Burns, to lead the central bank. Nixon wanted Burns to support his political interests; he once told Burns, White House tapes later revealed, that they could legitimately communicate through a secret back channel because of “this myth of an autonomous Fed.”
When Nixon thought Burns strayed from policies that favored his political interests, he hit back. In 1971, Burns was urging an “incomes policy,” an effort to use public pressure to hold down wage and price increases. Nixon had his hatchet man, Charles Colson, try to leak a false story that Burns was secretly lobbying for a personal pay raise. A month later, Nixon instituted sweeping wage and price controls, well beyond anything Burns suggested.
Then, the White House tapes revealed, the Fed chairman consulted with Nixon on how monetary policy could boost the economy to help him win re-election in 1972. The result was an expansionary policy in an inflationary environment, which came back to haunt the economy and cast a shadow on Burns’ legacy.
The Federal Reserve isn’t and shouldn’t be immune from criticism. Liberals often blast the central bank for being too close to big financial interests. Conservatives assailed Bernanke and Yellen for carrying out an unprecedented bond-buying program that pumped cash into the reeling economy after the 2008 financial crisis. Sen. Rand Paul, a libertarian, says the Fed is part of a “banking cartel” and needs to be weakened. These are all legitimate points of view.
But it’s not legitimate for a president to pressure the Fed to do his political bidding or to engage in vindictive attacks. During the campaign, Trump charged that Yellen should “be ashamed of herself.” If the business cycle kicks in before 2020, and there’s a downturn, this may seem tame.
The prediction among people who know him, though, is that Powell won’t be bullied.