August 9, 2024 - 4:00pm
“I made a lot of money, I was very successful,” said Donald Trump, when asked if he felt the president should have a direct say in the Federal Reserve’s policy decisions. “I have a better instinct than, in many cases, people that would be on the Federal Reserve or the chairman.”
We’ve been here before. Prior to Liz Truss’s disastrous 2022 mini-budget, she sidelined the Office for Budget Responsibility and wanted to review the Bank of England’s independence, convinced that their groupthink made them unable to grasp how her radical re-orientation of policy would revive the nation’s economy. In this she channelled the thinking of her economic gurus, who wanted to return to the days when the Treasury controlled both monetary policy and economic forecasting. In short, they reckoned they had a better instinct than the “anti-growth coalition” that had come to direct Britain’s economic framework.
A US President can’t just take control of Fed policy the way a British prime minister could notionally do with the Old Lady. Most Fed governors are selected by the regional Reserve Banks, so lie beyond the president’s influence. But the commander-in-chief gets to choose the chairman, and so could find someone like-minded. And to the extent the chairman has an outsized influence at the committee meetings which set interest rates, the president could apply considerable leverage through this back-channel.
We can probably guess what a Trump-directed Federal Reserve would then look like, because the United States had something similar before. During the presidency of Richard Nixon, Fed chairman Arthur Burns submitted to pressure from the president to keep interest rates low amid the period’s high inflation. This enabled the Nixon administration to run large fiscal deficits, since the Fed “monetised” government debts by effectively printing new money to cover the shortfalls.
But the addition of new money supply to the economy worsened inflation. It was only later in the decade, when President Jimmy Carter appointed Paul Volcker as Fed chairman, that this policy was reversed. Volcker’s famous “Saturday Night Special,” at which he announced the start of a period of sharply higher interest rates, forced governments to tighten their belts, and wrestled inflation back to the ground.
Ever since, it’s been orthodoxy for politicians to stay out of monetary policy, something enshrined in Britain in 1997 when Chancellor Gordon Brown gave the Bank of England operational independence. This has always rankled those who feel it’s undemocratic to give so much power over the country’s economic direction to an independent, unaccountable body. But the argument for central bank independence resembles what Winston Churchill said of democracy — a lousy regime, except for all the others. Or put simply, do we really want another Liz Truss moment?
The US is not Britain, of course. Trump would like to pull a Truss, raising the deficit to cut taxes, all while keeping interest rates low. But such measures would be much less likely to cause a market panic of the sort Britain experienced in the autumn of 2022. With by far the world’s deepest capital markets, not to mention its reserve currency, the US would not likely witness the dumping of government bonds on a scale anything like what Britain did.
Nevertheless, it would probably experience a gradual reduction in demand for its bonds, which would result in a steady rise in interest rates amid rising inflation. The pot might not boil immediately. Nevertheless the water in which the proverbial frog sat would likely keep getting hotter until the US got its next Volcker moment. Trump’s best hope would be to have finished his term before then.
John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a religion (Simon & Schuster, 2017).
jarapley
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Hmmm. This is a complicated and nuanced discussion, one which this article is not equipped to introduce.
On Trump’s core claim, that he would do at least as well as the current monetary policymakers, I see no evidence to suggest he is wrong when looking at the past few decades.
Frankly, a monkey could do at least as well as the current crop. Inflation stayed low for decades because productivity increases outpaced the money supply, not because of any clever stewardship.
And at every opportunity, the CBs blew up the money supply as hard as they could: through QE after the 2008 crisis, and more recently through more QE after the self-inflicted wound that was Covid.
These days, the currencies of the American Empire escape hyperinflation not through any wise monetary policy, but rather through its clever system of petrodollar seignorage. When that is challenged, no one’s instincts in the Fed or the ECB will much matter a damn: the interest rate rudder will snap in the storm hyper-stagflation.
Ya. This is way beyond my pay grade. I think it’s important to for independence beyond the interference of politicians, but what if the technocrats are actually incompetent? And it’s unserious to think that people like Mark Carney don’t have a political agenda.
Way beyond mine too. But I can read, and while the headline states that Trump is “playing a dangerous game with the Federal Reserve”, the article only quotes him saying, in response to a question (who asked it?) that he has a “better instinct” than some Fed governors, or the chairman. This is a mild, off-hand comment and not a “dangerous game”–plus the fact that Trump is out of power and cannot currently play any kind of game.
Putting “Trump” in any headline is apparently the way to get clicks, regardless of his irrelevance to the substance of the article. This is cheap, and Unherd should stop it.
It is just CPI-inflation that is somewhat under control. QE caused extreme asset inflation, which is not precisely healthy as you get a lot bad practices such as rent seeking. For normal people it is especially a problem when they try to buy a house for the first time. It basically ruined the dream of home ownership for an entire generation of the middle class. Or worse, pushes them into homelessness. That central banks are not political is naive I think. They probably had little choice but to act after 2008 and 2020 but then continued with QE and the ‘too big to fail’ narrative for too long, while governments failed to develop appropriate fiscal policies. Their policies were bound to transfer a lot of wealth to the upper class. That was either a choice or incompetence.
I favour c**k up over conspiracy, incompetence over credibility…
The central banks are not “independent”, they’re joined at the hip with Wall Street (and UK/EU equivalent financial industries)
The central banks drove the final nail into an already dying capitalism by rescuing the banks back in 2008.
They should have nationalised them, fired the management, rescued the depositors, and let the bond and share holders lose their shirts before selling them.
Instead they’ve incentivised ever-greater risk taking and flooded the world with liquidity that has shoved assets bought on margin into the stratosphere.
Can’t afford to buy a house? Thank your local central banker.
Is he going to audit the Fort Knox gold, that’s what I want to know!
If the Democrats want to control the very last institution they don’t already control, which is the Supreme Court, why can’t Trump try to influence the Fed? I agree that the Fed should be independent, but I seriously doubt they truly are currently as they plug every hole in the d**e with a seemingly unending supply of fingers.
Sorry, but the discussion under this article looks as stupid as the article itself.
First, Trump is not the president now.
Second, even what Trump says now is not what he will do if he becomes president.
That is why I commented on this article in the sense that the author’s goal was not even the audience here, but those people to whom the author wants to testify that he is always, most importantly, everywhere anti-Trumper.
Truss was undone by the BoE itself, selling gilts to undermine the mini-budget. Unfortunately, pension rules mean that pension funds are only allowed to invest in “safe products”, such as gilts. The return on these has been so bad during the period of NIRP and ZIRP that funds leveraged their “safe investments” until they become unsafe. When the BoE sold gilts it blew up their market so BoE had to intervene (again) to stop the pension funds from failing. It is no insignificant detail that one of the pension funds involved was one operated on behalf of the BoE staff…
It is hubris for anyone, including Central Bankers, to believe that they know what the correct rate of interest is – only the market can decide that.
Totally agree, though to go back to market-determined interest rates we’d have to completely reform the monetary system, in a way that would take away the seignourage that has benefitted the most influential and wealthy people on the planet, not to mention the politicians who bribe their electorate with goodies paid by debasing the currency
Discussions of inflation that ignore the roll of “greedflation”, (aka “seller’s inflation, see Isabella Webber @ UMass, Amherst) are ridiculous.
Basically corporations and other sellers take advantage of a bit of inflation to jack up their prices. For most of them their costs have not increased and aren’t likely to. Their one aim is to increase their profit margins. With luck, after the Fed is finished punishing the working and middle-classes, the new normal will leave them with higher profit margins.
Can you really blame them? How many of us wouldn’t do the same thing?
Which is why this needs to be stopped by legislation. Or the Fed needs to relinquish control of the interest rates.
Everyone who is not an economist knows this is happening. Why do academics get away with living in their own, very convenient, Fantasy Land? The most intellectually lazy people are always the experts. Why are we beholden to these characters?
The problem not stated is that, if the government does not control monetary policy, then the bankers do. It is difficult to find monetary economists to fill the decision making committees who have not worked in the financial markets and have no intention of doing so however large a salary is offered to them.
In the case of the UK since 1997, Brown connived with the bankers by under-representing the cost of housing in the inflation index targeted and by excluding the cost of saving for a pension altogether. The result is the rise in asset prices seen since, the inability of most people to buy a home and pension funds speculating in the gilts market, aka liability driven investment strategies. He did this because he wanted rising house prices and the consumption it provoked to hide the fact that he was doing nothing to regenerate industry.