Still Independent After All These Years

Following the Fed’s September 26 decision to raise the effective federal funds rate, President Trump has repeatedly expressed displeasure at the Fed’s allegedly “loco” rate hike decisions. Some worry even if Trump doesn’t have the authority or desire to fire Fed chair Jerome “J-Money” Powell,^[i] “sustained pressure” might spur Fed members to either cave or assert their authority via aggressive tightening. However, minutes released Wednesday from the Fed’s September meeting don’t imply presidential rhetoric is factoring into Fed decisions.^[ii]

Last Wednesday, amid market turbulence, the president opined to reporters, “I think the Fed is making a mistake. They’re so tight. I think the Fed has gone crazy.”^[iii] This week, President Trump alluded to the Fed as “my biggest threat,” noting, “I’m not happy with what [J-Money] is doing, because it’s going too fast.”^[iv] (“It” refers to the pace of interest rate hikes.) While both remarks came well after the hike, they spurred fears Powell—a Trump appointee—might soon feel he should follow his appointer’s lead. Others fret Powell won’t be able to “justify tightening credit … when inflation is tame, especially in the face of presidential criticism.”^[v]

Another camp fears Trump’s comments will have the opposite effect. Per one economist and ex-Fedster, Trump’s critiques might “stiffen [Fed members] backs on a close call. Many members of the FOMC will not want to see newspaper stories saying they caved to Trump.”^[vi] Ergo, more rate hikes, and sooner! Either way, Fed decisions wouldn’t be as impartial and independent—which monetary policy ought to be, to the extent that is possible.^[vii]

However, Trump’s preference for low rates isn’t new. He was voicing it all the way back in 2016 while on the campaign trail.^[viii] (Though to be fair, he also criticized low rates for a time.^[ix]) But concerns of undue pressure ratcheted up this July when Trump said he was “not thrilled” with the Fed’s June rate hike.^[x] He then reiterated the sentiment in August.^[xi]

While it is reasonable to ask what effect this might have on Fed members’ thinking, if all the “pressure” were getting into their heads, one would expect it to come up in rate hike discussions. Yet there is no mention of any such thing in the minutes from the Fed’s September 25 – 26 meeting. Not to say they should maybe reconsider raising rates given Trump’s opposition—nor to say they should definitely hike to demonstrate their unsullied independence. But the minutes suggest Trump’s soundbites didn’t even enter the conversation—at least not in any meaningful way. The Fed releases transcripts at a 5-year lag (boo!^[xii]), so maybe history will show Trump figured in somehow. But that might just be in a facetious aside or witty quip! FOMC members do love their wisecracks. For now, we have no evidence Trump chatter is playing a role in Fed moves.

Meanwhile, we have plenty of evidence Trump isn’t attempting to influence monetary policy the main way he could potentially do so—by using his Fed appointments on low-rate, easy money ideologues. Powell and others have more or less been establishment picks and continued Yellen & co.’s hiking plans. His latest hire—Nellie Liang, who he tapped in September well after he began hen-pecking the Fed—is about as Fed-insidery as you can get.^[xiii] Heck, Trump himself has sort of acknowledged this. Consider these (less reported) comments from his Tuesday “the Fed is my biggest threat” interview: “Can I be honest? I’m not blaming anybody. I put [Powell] there. And maybe it’s right, maybe it’s wrong, but I put him there.”^[xiv] To us, that sort of translates to, those guys and gals are doing what they are doing, maybe it works, maybe it doesn’t, but at the end of the day I’m the one who hired them, so oh well. For more on this topic, check out our 8/3/2018 piece, “The Fed’s Independence Doesn’t Seem at Risk.”