WASHINGTON — “To the barricades.”
That’s one way of characterizing Bill Dudley’s recent proposal that the Federal Reserve fight back against President Donald Trump’s unrelenting attacks. Although it’s a phenomenally bad idea, it has the curious and paradoxical effect of revealing the primary defects of Trump’s economic policies.
First, some background. Dudley — a former chief U.S. economist for Goldman Sachs — was head of the New York Federal Reserve Bank and vice chairman of the Federal Open Market Committee, the Fed’s main decision-making body, from 2009 to 2018. He made his proposal in two columns for Bloomberg Opinion. According to the Fed, Chairman Jerome Powell had no knowledge of the first article before it appeared.
In the first column (Aug. 27), Dudley correctly argues that Trump’s policies are built on a contradiction.
On the one hand, Trump wants the Fed to cut interest rates to spur economic growth and enhance his reelection prospects. On the other hand, his aggressive tariffs have arguably slowed economic growth. The mounting uncertainty raises prices and discourages firms from making new investments. Slowing economic growth then reduces the odds of Trump’s reelection.
The Fed is thrust into an awkward position, Dudley writes. If it surrenders to Trump’s bullying on interest rates, it becomes complicit in his anti-trade policies, particularly involving China. Worse, the Fed may inadvertently encourage “the president to escalate the trade war further, increasing the risk of a recession.”
Dudley wants the Fed to denounce Trump. “Officials could state explicitly that the central bank won’t bail out an administration that keeps making bad choices on trade policy, making it abundantly clear that Trump will own the consequences of his actions.”
What Dudley proposes would dramatically change the Fed’s political role — shifting it from a nonpartisan and technocratic institution, deciding when and how much to ease or restrict money or credit, into an overtly political entity with its own political agenda. Trump is pushing the Fed in that direction. Dudley’s plan would complete the journey.
His proposal would demolish the Fed’s standard defense of its “independence”: that it’s necessary to achieve its congressional mandates of “price stability” and “maximum employment.” The Fed would become an all-purpose economic agency that inevitably would be driven by partisan politics. You can imagine how long what’s left of the Fed’s “independence” would last. About 10 seconds. Dudley recognizes this but argues it’s inevitable.
“I understand and support Fed officials’ desire to remain apolitical,” he writes. But Trump’s “ongoing attacks on Powell and on the institution have made that untenable.”
He continues: “There’s even an argument that the election itself falls within the Fed’s purview. After all, Trump’s reelection arguably presents a threat to the U.S. and global economy, to the Fed’s independence and its ability to achieve its employment and inflation objectives. If the goal of monetary policy is to achieve the best long-term economic outcome, then Fed officials should consider how their decisions will affect the political outcome in 2020.”
Given the resulting controversy, Dudley published a second column (Sept. 4) denying what he clearly had advocated in the first. His proposal simply won’t fly politically — and shouldn’t. Elected officials surrender their explicit powers only when they’re convinced that the loss of these powers makes them politically stronger. Politicians are better off when unpopular decisions are shifted to somebody else. This certainly describes the Fed’s “independence.”
Politicians and economists alike recognize that there are times when the government must adopt unpopular policies for the country’s long-term welfare. In the Fed’s case, this usually involves higher interest rates to preempt financial speculation or undesirable inflation.
Few elected officials praise higher interest rates. But Dudley’s call to arms is over the top. The Fed’s vaunted “independence” is a messy arrangement full of potential inconsistencies, ambiguities and failures. It’s hard to describe as well as defend.
Its main virtue seems to be that it’s better than any likely alternative. The Fed’s best survival strategy is to do what it’s been doing along, which is to use its best judgment to fulfill its congressional mandates. Picking a fight it cannot win against Trump is simply asking for trouble.