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Autonomy of the Federal Reserve

By Staff | Apr 18, 2019

One characteristic of the Trump presidency has been the challenge of American institutions in some of the most heretofore bedrock ways that they operate. I am not a guardian of the status quo when they find something better, but that is not what has been challenged. It has been things like Justice Department and FBI autonomy from the White House. Congressional oversight is harassment in his perspective. Much of the government has been run by non-partisan professionals who actually do know what they are doing who have loyalty to the country first and not any political party or president. One can see how this grates on DJT who wants what he wants when he wants it. Everybody in government is now supposed to show fealty and loyalty to his brand. Poor Jeff Sessions. Donald actually thinks this is how things have been run and is trying to take it up to a whole new level of executive power. The GOP Senate, fearful of his base, has allowed him to usurp Congressional authority as outlined in the Constitution.

The institution that has now garnered the president’s ire and his focused attention is the Federal Reserve Board. The Fed has functioned as an autonomous body that operates outside the political arena. They practice monetary policy as central bankers without political consideration that Trump is now demanding.

Presidents have often been unhappy, to say the least, with monetary policy that impacts them negatively. George H Bush believed that Alan Greenspan cost him a second term. The Fed’s job is to conduct monetary policy, promote financial system stability, supervise financial institutions, keep inflation in check and support a stable dollar. The only way it has been able to function to do its job is that it has been kept isolated from politics. The president gets the privilege of appointing members to the board and the Fed Chairman but he does not get the leverage of being able to order what policy that he wants from them or fire them if he does not get it. At least that has been the way it was until DJT, who is taking a more hands on approach to say the least.

My personal opinion is that Chairman Ben Bernanke did a wonderful job of managing the Great Recession so that it did not become the second Great Depression. Congress provided a minimum of fiscal stimulus wrapped up in their usual partisan deadlock. Congress could not handle a real crisis today. The economic recovery from the Great Recession was more due to Fed monetary policy than anything else. Its independence allowed it to function when other levers of government under political control froze up. The Fed performed professionally and even bravely as it went to great lengths to put a floor under the economy and restore confidence. The need to take interest rates near zero and resort to quantitative easing was the result of necessity as it was countered by Congressional functional incompetence and inability to manage anything of consequence. The Fed worked like it was supposed to.

DJT understands fiscal stimulus and how it makes an economy grow. He and the GOP pushed through a historic tax cut. It was historic in terms of the size of the cut in corporate tax rates as well as in its timing near the end of a long recovery period in the business cycle.

Trump wanted to use fiscal policy to give GDP a boost, so faster growth would offset what otherwise results in an inflated federal debt as revenues are falling far short of spending. OMB says his federal stimulus is generating a $trillion in debt annually at the present growth rate. Trump’s fiscal stimulus was like pressing down on an accelerator but the Fed action raising rates applied more braking, taking the pizzazz out of Trump’s economic plan. Understandably he is not the least bit happy about that. The Fed has controlled inflation and stability for the dollar but at the expense of a percent or so of GDP growth. The Fed is long term while Trump is thinking 2020.

Past presidents would have respected the autonomy of the Federal Reserve and accepted their management of interest rate policy as best long term for the economy. Not this president. He wants Chairman Jerome Powell’s hide and when he found out that his executive power was limited as to removal of a Fed Chairman, he has been driven almost literally berserk. He doesn’t handle being told no well over much of anything. He takes it as a personal insult that the Fed monetary policy is squashing the impact that his fiscal policy was supposed to have on the economy. It was never likely going to work like Trump wanted but the Fed does provide a convenient scapegoat so he is setting them up for the fall. More debt and the increase seen in interest rates has increased the pressure that the cost of debt service has on the overall federal budget.

It will eventually extrapolate into a fiscal crisis. The Fed has been surprised by the complacency of inflation which was reflected in long term rates so the action of the Fed to increase short term rates flattened the yield curve.

As Trump can’t go after Fed Chairman Jerome Powell, his next recourse is to appoint sycophants to the Fed board that will do what he tells them. The men that he has nominated, Stephen Moore and Herman Cain, are as ill-suited to act as independent professional central bankers as they come. They would be put on the board to do the president’s bidding and undermine the autonomy and independence of the Fed. I would find it hard to think that the Senate would confirm them but Trump’s use of fear to intimidate GOP senators has completely done away with Profiles in Courage coming from that body. The last one who deserved that honor was John McCain and DJT is still going after him in the grave. Jerome Powell should expect no better treatment.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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