[This blog post comes in part from a policy brief co-authored with Simon Johnson, forthcoming]
Like all the other academic idiots out there who failed to see this coming, I thought Trump’s chances for victory very low. Time was, I worried that Trump’s loss in November, the Fed’s raising of rates in December would lead to the ultimate of conspiracy theories: that the Fed threw the election for Hillary Clinton.
So much for the all-encompassing power of the Federal Reserve.
Now that the Trump Administration is upon us, several commentators are thinking that the Fed will be next in the long line of institutions that will face Trump’s wrath. Given that Trump has made clear that he has little interest in policy details, the growing conventional wisdom tells us that Republicans will finally get their wishes when it comes to the Fed: a more permanently hawkish central in the form of rules-based monetary policy that favors the Fed’s price stability mandate over its full employment mandate. After all, Republicans have railed against the Fed for being too dovish during the last eight years. When power changes as sweepingly as it has in this election, we can expect that list of deliverables to include the Republican program on monetary policy.
Not so fast. Let me note again that my powers of prognostication haven’t been very impressive when it comes to Donald Trump, but I don’t think this conventional wisdom will deliver its promise, for two reasons.
First, this narrative fails to distinguish between policy principles and coalitional tactics. By that distinction, I mean this: When the coalition is in power, it will pursue policies based on its core principles. When it is out of power, it will pursue tactics to place it back in power. For example, a core principle for the Republican coalition is to staff the judiciary with judicial conservatives (a category that is itself difficult to define with principled permanence, but probably includes hostility toward abortion rights, minority rights, affirmative action, and the other cultural touchstones that the Court has adjudicated). An out-of-power tactic is to claim that no president in his fourth year of a term should be able to appoint a Supreme Court justice. The core principles will only change as a coalition’s members change; the out-of-power tactics will change immediately upon a transition of power. For a funny-because-it’s-true example of this, see Orin Kerr’s 2008 post to the political classes about the need to switch principles on executive power, judicial confirmations, and congressional oversight. Kerr’s point wasn’t that there were no principled conservatives who valued executive power, a free rein in appointing judges, and the need to limit congressional oversight. The point was that these weren’t core principles; they were largely coalitional tactics. This distinction is an oversimplification of course, but it does real work in helping us understand why it seems that transfers of power lead so quickly to charges of political hypocrisy.
The task for predicting the Trump Administration’s interactions with the Fed is to identify where its core principles are with respect to monetary policy, and where its tactics against the Obama Administration have entered into monetary policy debates. The question, then, is this: has the Republican hostility toward the Yellen and Bernanke Fed’s monetary policies been about principle, or tactics?
I have no doubt that certain Republicans—John Taylor, for example, or Rand Paul (and I think Jeb Hensarling, though I’m unsure about this)—view the Fed’s policies as wrong on principle, no matter who is in power. But history tells us that affection for loose monetary policy is a bipartisan affair: when a political party has control of the White House, loose monetary policy will find all kinds of arguments in principle and fact. When they are not, the many virtues of tight money are more apparent. And while there is a hint of ideological content in the dove vs hawk phenomenon, it is just a hint. The prospect of losing an election because employment is a few points down concentrates the politician’s mind wonderfully.
Many have marveled at how the politics of monetary policy have flipped the script in the last eight years. The populist threat was always like William Jennings Bryan and his charge that the Republicans could not “crucify mankind on a cross of gold” with tight monetary policies. But during the Obama Administration, the populist lamentation has been just the opposite: the Fed has hijacked the economy with a monetary policy too loose for the public’s tastes.
The answer to this apparent dilemma is that it has little to do with core principles and everything to do with coalitional tactics. An accommodative monetary policy helped the Obama Administration, and threatened to elect his preferred successor. That it didn’t is a remarkable thing, but much opposition to the Fed is just a way for partisan tacticians to wage war on another front. Now that the war is won, the Republicans in power will take a different look at the Fed. We’ve seen this again and again and again: whatever the party in power, an accommodative Fed is a desirable Fed. This is why central banks seek independence in the first place.
That’s the first reason I suspect we will see a different Republican consensus arise around the questions of Fed policy. The second is more specific to Donald Trump. As I’ve noted elsewhere, Trump doesn’t seem to abide by the prospect of multiple power centers in government. As with his unprecedented attack on the Fed during the first presidential debate, expect to see a Trump who will do all he can to prevent the Fed from moving toward tighter money during his Administration.
There remains a distinct chance that Trump will simply not connect these dots, and that the coalitional partners who, on principle, favor a more hawkish central bank will prevail. But I think the likelihood of this is low. It is time to pay Trump his due: he is paying close attention. The Trump Administration will have the advice of people who will be aggressively suspicious of technocratic elites trying to wrest power away from the President. The idea that he will follow the lead of his predecessors over the last 40 years and give the Fed its space is not likely. Nor is it likely that he will willingly concede power over money to Congress.
For these reasons, I expect a coming confrontation of historical proportions between the Trump Administration and the Fed. The question for tomorrow will be this: what, if anything, can the Fed do about it?