Notice & Comment

Republicans and the Russians: What Sen. McConnell’s inquiry has to do with Fed independence

Today Senator Mitch McConnell, in an apparent reversal, launched what he described as a bipartisan inquiry into whether the Russian government sought to interfere with the US election. Given that President-elect Trump hasn’t been too fond of this theory of the election, and that Sen. McConnell forcefully defended the CIA and intelligence community while the President-elect has been disparaging them, things may get very interesting as two wings within the fractious Republican coalition come to head.

The obvious question on all of our readers’ minds is, of course, simple: What does this have to do with the Fed?

As I’ve argued previously, and recognizing the limits of these predictions, there is a coming confrontation between the Federal Reserve and the Trump Administration. Trump, as has every president before him, will favor looser monetary policy and easier credit than the Fed; indeed, one of the primary mechanisms of price stability is to count on this dynamic between politicians and slightly more monetarily conservative central bankers (see here for Rogoff’s classic articulation of the phenomenon).

If there is nothing unusual about a Trump administration that adopts this posture, there is enough of Trump’s individual conceptions of power and the economy that point even more heavily toward this confrontation, including his predilection for scapegoats and conspiracy theories to rally voters to his cause. The Fed is an easy target for both.

Republicans during the last eight years have also been frequent and vociferous opponents of the Fed’s policies, but from precisely the opposite perspective of what we can reasonably anticipate from the Trump Administration: Republican critics have characterized the Fed’s policies as far too easy, not too tight. Obviously, many disagree–see here for a profile of Narayana Kocherlakota, one of the great central bankers of the 21st century and his slow change in perspective on this point. But the Republican battle cry against the Fed has been in favor of higher interest rates, not lower ones.

The question the Russian probe brings to mind, then, is where the Republicans will be when that Fed confrontation comes. Many perhaps most Republicans simply don’t care about the Fed–they come to their coalition through other means, and are happy to recite talking points on monetary policy no matter what those talking points may be. I’m not being a partisan cynic when I say this–Democrats are the same. We can’t be experts at everything, and party affiliation is a heuristic that allows us to focus on what we care about and defer to our partners to fill in the blanks of our knowledge elsewhere. For some, then, just as with the alleged Russian interference with the election, the watchword won’t be policy principles but party power.

For others, Trump’s aggression toward the Fed, should it come, will cross a line in the sand. Senator McConnell has essentially drawn that line with today’s announcement and the praise for the intelligence community he offered in the same breath. When the Fed faces presidential ferocity–in the form of angry tweets, hostile interviews, or proxy war throughout the commentariat–where will the Republican Party be?

It’s an open question, and here I won’t venture a guess. But Sen. McConnell today gives reason to suspect that the Trump Administration won’t be in a position to alter every institutional arrangement he encounters on his path to reelection.