Notice & Comment

Donald Trump and the Federal Reserve

Central bankers often insist that ideology, values, worldview, and—that much-hated term—politics play no role in influencing their decisions. This is a very useful dodge on their part. It’s a dodge because, as I have argued in my book The Power and Independence of the Federal Reserve, expertise is inevitably and appropriately ideological, the process that yields decisions ineluctably political. The morass of uncertainty that our central bankers must navigate cannot be divorced from the world from which they are drawn. There’s a reason that serious economists like John Taylor and Ben Bernanke take diametrically different views on the economy. Their training is not enough to answer that difference, since their training was very similar. Their worldviews–their values, what they find persuasive and why–that’s the difference.

This isn’t to say that there are no correct answers in central banking, or that it is all politics all the way down. It is only to say that there is a point at which serious expert consensus evaporates. For the most interesting policy questions a central bank must confront, that breakdown of consensus occurs well before the hour of decision. What fills the gap between expertise and that decision is the central banker herself, including her worldview, her values, and, yes, her ideology.

When central bankers insist to the contrary, though, they’re performing a useful function. The dodge is useful because “politics” in the sense that I’m using it is not at all the same as “partisan electoral politics.” It’s difficult any time, and perhaps impossible today, to engage the public in the finer points of the legitimizing inevitability of politics, even as the Fed rightly insists that their own politics have little or nothing to do with swaying elections. These are two different conversations, and the first isn’t nearly as interesting to the public (especially during this electoral season) as the second.

Enter Donald Trump. As recently as May, he seemed like a regular central banking dove. “I have nothing against Janet Yellen whatsoever,” he said in an interview with CNBC. “She’s a very capable person. People that I know have a very high regard for her.” And later: “She’s a low-interest-rate person; she’s always been a low-interest-rate person. And I must be honest, I’m a low-interest-rate person.”

Trump’s old view of Janet Yellen makes abundant sense for a real estate builder whose empire, such as it may be, was built on a mountain of debt. But this view, however economically rational, is hardly Republican Party dogma. Most Republicans have seen the Fed’s easy money policies as anathema to a free society and sure to bring in record levels of inflation. As Ben Bernanke explained this phenomenon in his memoir (on page 433), explaining why he has left the Republican Party, Republicans “saw inflation where it did not exist and, when the official data did not bear out their predictions, invoked conspiracy theories.” Despite his penchant for conspiracy theories, Trump the real estate mogul had little use for the theories of that constituency: he knew all too well what builders throughout the economy do with easy debt. His embrace of Janet Yellen, then, wasn’t terribly surprising, even if his fellow Republicans recoiled at the thought.

That was then, this is now. True to form, Trump appears not only to have abandoned a previous worldview, but to have taken the new dogma and sprinted with it. Not only is the Fed wrong to have kept interest rates low, he says, it is in fact trying to rig the election itself. First, in another interview on CNBC, he claimed that Yellen is “keeping [interest rates] artificially low to get Obama retired. It is a very serious problem and I think it is very political. I think she is very political and to a certain extent, I think she should be ashamed of herself.”

And then again, in the august halls of the Economic Club of New York, he repeated a variation on that theme: “I think the Fed is being totally controlled,” he said during the question and answer session following his scripted remarks. “They’re not raising rates. And they’re being controlled politically.”

What to make of this about-face? Is there any truth to the idea that presidents and their central bankers will try to influence elections?

There is some evidence historically. Indeed, the very concept of central bank independence relies on the idea that all politicians will want to get economic prosperity in any way they can—authentically if they can, on the cheap through high inflation if they can’t. Most infamously, Richard Nixon’s Fed Chair, Arthur Burns, appears to have done exactly this in the 1972 election, as the Nixon tapes and Burns’s own diaries reaffirm.

Today, though, there is simply no evidence that such collusion is occurring. There is in fact abundant evidence to the contrary. This point bears some emphasizing: what we are seeing today within the Fed has almost no relationship with the Nixon-Burns debacle. Janet Yellen famously refused to even lobby for her own appointment to the Fed. She had essentially no relationship to the Administration beforehand, unlike Burns who had sought to influence Fed policy during the Eisenhower Administration so that Nixon could win the 1960 campaign against John F Kennedy. Burns’s partisanship was no secret—Nixon wrote about it in his 1962 book, Six Crises (on pages 309-310).

Far from being an Obama lackey, Yellen is largely a creature of the Federal Reserve System. She is the single most experienced Fed Chair in its history, serving her fourth tour of duty on the Federal Open Market Committee (the previous record was a tie for two, between Ben Bernanke and Paul Volcker—most Fed Chairs had never been central bankers before their appointment). What’s more, as any observer of the Fed post-crisis can confirm, the debates that undergird the present low-interest environment have nothing to do with the 2016 election. Trying to navigate the consequences of the 2008 financial crisis and the deep recession that followed has consumed central bankers the world over. How to deal with undershooting their inflation targets, unemployment rates that are drifting downward, and still persistently low interest rates has been the order of the day for years.

Mr. Trump, then, isn’t really talking about interest rates. He’s not really talking about unemployment, or inflation, or even the broader economy. This latest flip-flop has nothing to do with policy substance. It is instead part of a brilliant, until now successful, and, whatever your politics, an inherently toxic strategy to delegitimize our public institutions. He started most infamously with the Presidency and his still ongoing insistence on birtherism. He takes pride in and credit for undermining confidence in the media. He has launched the same delegitimizing effort against our senior military officials. He accused a federal judge of incompetence based on his parents’ country of birth, what House Speaker Paul Ryan called a “textbook definition of a racist comment.” And he has said that our core political institution, the quadrennial presidential election, will be rigged if he loses.

This strategy is separate from (though, as we see in the case of the federal judge, related to) his other campaign strategy of scapegoating immigrants and Muslims. It is a broader effort to undermine any public confidence in anything other than Donald Trump. If enough of the public believes the Trumpian narrative, that our institutions are corrupt to their core, then they will be more open to his campaign. “Nobody knows the system better than me,” he said in on accepting the Republican nomination for president. “Which is why I alone can fix it.” In the face of evidence that the economy is recovering and the bleak hellscape he painted didn’t exist in the way he described it, he knew what he needed to do: delegitimize the Fed.

This strategic delight in blowing up confidence in public institutions is what makes a President Donald Trump so much more dangerous than a candidate Donald Trump. Can anyone imagine a President Trump deferring to the Fed in the 2020 election? His conception of power doesn’t abide by multiple power centers. While he bemoans low interest rates today, we’ll see a Nixon-Burns redux in the next round, and perhaps something even more egregious. To those for whom fighting inflation is a core economic interest, one searches history in vain for a U.S. politician more dangerous than Donald Trump.

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It is a bit ironic for me to write about Trump in this way. In debates about the Fed and its structure, I’m consistently one who argues that we invite too much reverence and too little scrutiny into the Fed. The Fed’s decisions affect all of us, in ways large and small. It’s a civic duty to argue about it and its policies.

But that is not what Trump is about. His isn’t an invitation to think hard about when and how to increase interest rates, or about any policy-making process within the Fed. His is an effort to collapse a political system and replace it with a cult of personality. One can only hope that, whether he wins or loses the election, enough of the country will see through this strategy and recognize that, with all of their many faults and flaws, our national institutions—from the military to the judiciary, the Presidency and yes, the Federal Reserve—perform remarkably well.

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