The future of United States monetary policy also depends on the result of the polls in the presidential elections on November 5. During his presidency, Donald Trump showed little respect for the independence of the Federal Reserve and criticized its president, Jerome Powell, whom he himself had appointed and whom Biden later renewed until 2026. Now, he has not only said that he will not count with Powell for a new mandate, but advisors in his campaign orbit are considering more drastic proposals. In this context, the White House has come out in defense of the independence of the central bank through its Council of Economic Advisors (CEA).
A few days ago, the aforementioned organization published what would almost seem like an academic article if it were not for the moment in which it was published. “The Biden-Harris administration has not stopped insisting on the importance of an independent central bank. “Given that this issue has been raised in various contexts, the CEA thought it was a good time to explain what central bank independence is and why it is so important,” the statement begins.
Among those “various contexts” is Trump’s insistence on questioning Powell. When he was in the White House, Trump asked him to lower rates. Now, he baselessly suggests that if he lowers them (which has become unlikely in the short term) it would be to help Biden’s re-election. In addition to Trump’s public comments—and, to the contrary, from some Democratic congressmen—, The Wall Street Journal revealed a few weeks ago that allies of the former president were studying proposals that would erode the independence of the central bank and that they had put them into a summary document. 10 pages.
To begin with, although Powell’s mandate should be respected until its conclusion in 2026, they argue that Trump would have the possibility of appointing a new chairman of the Federal Reserve if he returned to the White House. It would be enough to respect that Powell remains on the council, according to that controversial thesis.
The group that has been working on the proposals is made up of former Trump administration officials and other allies of the former president, but does not play a formal role in his campaign. Along with the hypothesis of Powell’s early dismissal, the proposals contemplate that Trump has to be consulted on decisions on interest rates and recommend subjecting the regulations to be approved by the Federal Reserve to the review of the White House and the Treasury. That can affect the financial sector.
The current president, Joe Biden, has made clear that he respects the independence of the central bank, even though both inflation and high interest rates have eroded its popularity. He proclaimed it in May 2022 in an article in The Wall Street Journal: “My predecessor demoted the Fed, and past chairs have inappropriately tried to influence its decisions during periods of high inflation. I won’t,” he wrote. And then he conveyed that same message to her in person. Current Treasury Secretary Janet Yellen was Powell’s predecessor as Federal Reserve chair and National Economic Council Chair Lael Brainard was vice chair.
In its recent release, the White House insists that research, theory and evidence reveal that a central bank’s ability to conduct monetary policy without political interference is a critical component of its ability to control inflation. This is the case in almost all advanced economies and many developing countries. In the United States, Congress formally established the Federal Reserve’s dual mandate to ensure full employment and price stability and took steps to insulate it from political interference through the Federal Reserve Reform Act of 1977.
The CEA notes that when credibility is undermined by political influence, individuals, companies and other price-setters are less likely to believe in the central bank’s commitment to reducing inflation, which in turn can induce higher inflation. And he uses a quote from another former Federal Reserve Chairman, Ben Bernanke, to argue: “A central bank subject to short-term political influences would probably not be credible when promising low inflation, since the public would recognize the risk that the Monetary policymakers could be pressured to apply short-term expansionary policies that would be incompatible with long-term price stability.
The White House reviews history to give examples of how a non-independent central bank can be subject to political pressure to move quickly. Remember that Richard Nixon pressured then-Federal Reserve Chairman Arthur Burns to design a favorable economy in time for the 1972 presidential election. And before that, the tensions between President Harry Truman and the central bank after World War II World War, when the Fed raised rates to contain inflation.
“In the Biden administration (…) we will continue our unwavering support for central bank independence,” concludes the BEA. “History could not be clearer regarding the lasting and damaging inflationary consequences of ignoring this lesson or reversing the hard-won progress of the last half century,” he adds, without ever mentioning the proposals from the orbit of Trump.
Powell ignores pressure
Powell himself has insisted in recent months on the importance of carrying out his task outside of political pressures. “In the case of the Federal Reserve, independence is essential to our ability to serve citizens. “The record shows that independent central banks produce better economic outcomes,” he said last month at an event at Stanford University. “Federal Reserve policymakers have long tenures that are out of sync with election cycles. Our decisions cannot be revoked by other levels of the Government, except through legislative means. This independence allows and forces us to make our monetary policy decisions without taking into account short-term political issues,” he added.
The price of money is in the range of 5.25%-5.5%, its highest in more than 23 years. Until a few months ago, it seemed that the central bank was going to start lowering interest rates in the months before the elections, but poor inflation data in the first quarter has pushed back on cuts. Investors are waiting for the members of the monetary policy committee to update their forecasts on June 12, but the market now only sees a likely cut of 0.25 points before the end of the year, instead of the three that the Reserve itself Federal predicted in March.
At the press conference after the last meeting of the monetary policy committee, on May 1, Powell challenged anyone to find any political reference in the transcripts of the Federal Reserve meetings close to previous elections. “We are always going to do what we believe is right for the economy. That is our trajectory. That’s what we do. We don’t look at anything else. It’s hard enough to do things right financially. These are difficult things, and if we were to take a whole other set of factors and use that as a new filter, it would reduce the likelihood of us actually getting the economics right. That’s how we think about it and we’re at peace about it. We know that we are going to do what we believe is right,” he insisted.
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