Former New York Fed President William Dudley on Tuesday touched a central-banking third rail by suggesting the Federal Reserve refuse to “play along” in President Donald Trump’s trade war with China.
In an op-ed on Bloomberg, Dudley said the trade war was a “manufactured disaster-in-the-making” for the U.S. economy.
And, given that the Fed’s goal is a healthy economy, the Fed should hold off interest-rate cuts to discourage the president from escalating the trade war further, Dudley suggested.
This alone is a controversial opinion, but the former Fed official went further, suggesting the Fed might consider actions that would reduce the chances of Trump’s re-election. “If the goal of monetary policy is to achieve the best long-term economic outcome, then Fed officials should consider how their decisions will affect the political outcome in 2020,” he said.
‘If the goal of monetary policy is to achieve the best long-term economic outcome, then Fed officials should consider how their decisions will affect the political outcome in 2020.’
In a statement, Fed spokeswoman Michelle Smit said political considerations aren’t part of Fed deliberations. “The Federal Reserve’s policy decisions are guided solely by its congressional mandate to maintain price stability and maximum employment,” she said.
Tony Fratto, a former White House spokesman under President George W. Bush and now a managing partner at Hamilton Place Strategies, called Dudley’s op-ed “silly” and said it would give new ammunition to Fed critics:
Megan Greene, senior fellow at the Mossavar-Rahmani Center for Business and Government at the Harvard Kennedy School, said that Dudley’s suggestion would suck the Fed into the political fray:
The Fed generally prefers to retain its statutory independence with the view that they should react to developments in the economy resulting from policy decisions by the White House or Congress, rather than enter the political debate pre-emptively.
‘If the stormy wind comes from the mouth of the president, the Fed is still supposed to lean against it.’
“If consumers stop buying cars for some reason and a recession looms, the Fed is supposed to lean against that stormy wind,” said former Fed Vice Chairman Alan Blinder, in an interview with MarketWatch at the Fed’s annual gathering in Jackson Hole, Wyo.
“If the stormy wind comes from the mouth of the president, the Fed is still supposed to lean against it,” Blinder told MarketWatch.
“It doesn’t mean the Fed is doing the president’s bidding, but sadly it will get reported that way,” he added.
Blinder called the trade war a “stagflationary shock” that would hurt demand and boost inflation.
Fed Chairman Jerome Powell talked in Jackson Hole about how difficult it is for the Fed to gauge the economic effect of the uncertainty surrounding the U.S.-China trade war. “There are no recent precedents to guide any policy response to the current situation,” Powell said.
Fed interest-rate policy is a powerful tool, “but it cannot provide a settled rule book for international trade,” Powell said.
Trump has been blistering in his attacks on the Fed for not slashing interest rates, even calling Powell an enemy.
Dudley is not the first former Fed official to criticize Trump.
Former Fed Vice Chairman Stanley Fischer told the Jackson Hole conference that the behavior of the Trump administration was the “key problem” in the outlook for the global economy, according to the Wall Street Journal.
The Fed community, writ large, is worried that Trump may try to remove or demote Powell from his post.
Four former chairs of the Fed jointly penned an op-ed in the Wall Street Journal calling on Trump to resist this unprecedented step and urged a cease-fire in his war on the Fed.
While it seems clear that Trump could not legally remove Powell from the Fed board, the matter of whether he could strip Powell of his chairman title and nominate someone else to the post — allowing Powell to stay as a governor for a term that does not expire until 2028 — rests in a gray area.
One Fed official told the New York Times that if Trump tried to demote Powell the Fed’s interest-rate-setting Open Market Committee would merely elect him as the FOMC’s leader.
The bond market expects the Fed to cut interest rates for the second time this year at its next meeting in mid-September. Investors first priced in a high probability of a cut after Trump escalated his trade fight with China with new tariffs on Aug. 1.
The yield on the 10-year Treasury note
has fallen to 1.54% from its 3.23% level last November as the Fed has reversed course and started easing monetary policy.