President Donald J. Trump announced the nomination of Jerome Powell to be Chairman of the Board of Governors of the Federal Reserve System | November 2, 2017 (Official White House Photo by Andrea Hanks)
From its origins as a lender of last resort to prevent unnecessary banking panics, the Fed has morphed into a beast of an institution, with far too much influence over the economy, financial markets, and the distribution of wealth.
Look no further than the Trump administration’s recent focus on the Fed’s interest rate policy. The Fed was setup to be an independent institution to keep it above the fray of politics. But with ever expanding influence and power, it is inevitable that the Fed will always be lobbied to accommodate the political class.
The problem with the Fed is not that the Trump administration wants it to give the markets and the economy a short-term boost with easy money. What politician wouldn’t want the Fed on its side?
The problem is that the Fed’s mandate has grown to include management of the economy in the first place. A Fed focused on preventing banking panics is a workable model. A Fed focused on steering growth and inflation in a $21 Trillion economy down to the decimal point by manipulating interest rates invites mischief.
The WSJ has more on the Trump administration’s recent focus on Fed policy.
Top White House and Federal Reserve officials squared off over interest rates Friday in a public clash over how to manage the economy at a time of strong growth and historically low unemployment.
Vice President Mike Pence and White House National Economic Council Director Lawrence Kudlow—echoing President Trump’s comments Tuesday—called on the Fed to lower interest rates, saying the economy’s engine could handle more fuel.
“The economy is roaring,” Mr. Pence said Friday in a CNBC interview, not long after the Labor Department reported the jobless rate had fallen to 3.6% in April, the lowest level in 50 years. “This is exactly the time not only to not raise interest rates, but we ought to consider cutting them.”
Fed Vice Chairman Richard Clarida—echoing Fed Chairman Jerome Powell’s comments Wednesday—said a short time later in a speech there was no need for the Fed to move interest rates either way.
Administration officials also said they were considering Paul Winfree, the former deputy director of the White House Domestic Policy Council, for a spot on the Fed’s board of governors.
The White House officials’ comments suggested they are seeking to raise pressure on the Fed to cut rates after its unanimous decision Wednesday to leave its benchmark rate in a range of between 2.25% and 2.5%—ignoring Mr. Trump’s call for a 1-percentage-point reduction.
They also indicated they will keep trying to place Trump allies on the Fed’s board, even though two of the president’s picks were forced to drop out in recent weeks due to Senate resistance.
Read more here.
Jeremy Jones, CFA
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