No Danger of a Trump ‘Takeover’ of the Fed

Mike’s commentary on the struggle, or lack thereof, for “partisan” control of the Fed.
 
Also this afternoon, the Minutes of the March FOMC meeting had few newsworthy disclosures that Powell had not already covered in his post-meeting news conference. We were pleasantly surprised, however, to see that “participants also mentioned a number of upside risks.” Powell had focused overwhelmingly on downside risks.
 
No Danger of a Trump ‘Takeover’ of the Fed
 
Undeniably, President Trump sent a message to the Fed with his nomination of economist, activist and pundit Stephen Moore to fill one of the vacancies on the Fed Board of Governors. Like many of the president’s messages, it was too loud, it was too coarse, and it will be followed by little in the way of concrete action.
 
Trump will not “take over” the Fed, or seriously influence monetary policy. Nor, FMI believes, does the president even want such an outcome.
 
Moore’s recent call for a -50BP immediate cut in the fed funds target rate may well reflect the president’s preferred policy. But, 1) Moore is unlikely to be confirmed (and Trump knows it) and 2) even if Moore were to join the Fed Board, the FOMC will likely not enact any rate cut, let alone two -25B moves.
 
Aside from any other baggage, Moore has many enemies in the GOP Senate delegation after spending nearly two decades backing their primary challengers through his Club for Growth. FMI would not be surprised to see Moore’s nomination withdrawn or left to expire without getting a vote as happened to Marvin Goodfriend last year.
 
As for rate cuts, even the new “uber-patient” FOMC left modest tightening in the dot plot, albeit not until late 2020. If the macro data instead follow FMI’s more upbeat forecast, we expect gradual tightening to resume by end of this year.
 
Trump and top White House economist Larry Kudlow, a long-time Moore ally, may well think Moore would be a fine Fed governor -- though neither apparently gave even a passing thought to making Moore Fed chairman last year -- but that is not the point of the nomination. Like much of the presidential twitter feed, Trump’s message to the Fed is its own point. The president wants the voters to believe that the Fed has pushed interest rates too high and that any shortfall in the economy is the fault of the Federal Reserve, not his own.
 
If the economy continues to do well (as FMI believes it will), then the president will claim more credit for overcoming Powell’s bad decisions and promise even better results ahead.
 
BEHIND THE FED’S INDEPENDENCE
 
Trump’s use of the Fed as a punching bag has been more vigorous than most past presidents, but it is hardly exceptional. In fact, it is the very reason that the Fed exists in the first place.
 
The Federal Reserve was created in 1913 as an independent agency not because politicians wanted to surrender their power -- when has that ever happened? Rather, they wanted plausible deniability -- the ability to blame any problems in the economy on someone else.
 
This arrangement is helped considerably by the fact that monetary policy famously works (or does not work) with long and variable lags. Unlike pork-barrel spending, Fed policy is an unwieldy tool to reward constituents. In the one broadly-accepted historical example of the Fed bending to partisan concerns, Fed chairman Arthur Burns may have stimulated the economy to help Nixon’s re-election bid in the early 1970s. Yet the following stagflation would have deeply scarred Nixon’s presidency, if Watergate had not done that first.
 
Trump may well wish that interest rates were lower, but given the uncertain effects of such a move, he will not risk political capital to accomplish it. We do not expect a knock-down effort to confirm Moore. Or Herman Cain (who has not even been nominated yet). Trump also quickly abandoned Goodfriend last year rather than fight to get the one or two Senators’ votes needed to bring him over the top.
 
We note that Trump is following his predecessor’s example in making the Fed a low priority -- Obama showed no urgency in filling Fed governor vacancies. There is just little political benefit in manipulating the Fed.
 
In any case, Trump has already surrendered any ability to dominate the Fed. He appointed Powell chairman with no quid pro quo; Trump did not ask for and certainly did not receive any pledges by Powell on the course of policy. Trump also “wasted” his first three Fed governor nominations on people (Quarles, Clarida and Bowman) who have voted in lockstep with Powell. Trump can still fill the two current vacancies. He also has the option to replace Bowman in January when her partial term expires (we expect he will nominate her to a full 14-year term). Still, this would not be enough to contest control of the Fed Board of Governors let alone the far more important FOMC, where five Fed bank presidents also get a policy vote. Chairman Powell will continue to set Fed policy.
 
TRUMPED UP ‘PARTISAN’ FED FEARS
 
Critics’ newfound concerns about partisan influence over the Fed are… insincere. Their opposition is to Trump in general and has little to do with the Fed.
 
While the Federal Reserve Act gave the governors staggered 14-year terms to minimize any president’s appointees, very few governors serve a full-term. They are lured away by greener pastures on Wall Street or driven away by boredom. Replacements fill the remaining part of their terms.
 
Because of these exoduses, Obama was able to nominate the entire Fed board (including Powell, then the token Republican). Bush, Clinton and Reagan also nominated decisive majorities. Because of the luck of the calendar and Obama’s lackadaisical approach to Fed nominations, Trump has appointed more governors sooner than his predecessors, but the Board’s current partisan slant is hardly unusual.
 
In one of the many recent partisan-fear-baiting articles, former Fed vice-chair Alan Blinder, a Democrat, told the NYT that “People around the [FOMC] table did have political views, but you weren’t supposed to bring them into the room when it was time to make a decision, and people didn’t.” That, of course, is not remotely true.
 
Whether Blinder is lying or delusional, we leave as an exercise to the reader. Just as everyone thinks they are the hero of their own story, no one admits their own biases. Other people have political motivations; we have principles.
Fed nominees are not chosen by random draw from the AEA membership rolls. As old-time Chicago ward heelers would say, “we don’t want nobody nobody sent.” All Fed governors, like virtually every other federal appointee, have a patron(s). There are expectations for how those nominees will perform their duties.
 
Fortunately for the Fed and for the country, those expectations are anchored closely around the dual mandate of price stability and full employment, surely a bipartisan objective. While a Trump Fed Board may well take a different tact on regulations than, say, an Obama-nominated Board, for the macro economy, they are both data dependent.