The Fed’s Independence from President Obama Is Much Exaggerated

Fed Governor Lael Brainard declared yesterday that the Federal Reserve “is designed to ensure that independence from the executive branch is absolutely the focus of the deliberations of the Federal Open Market Committee.” It is clear that her comments were a response to Donald Trump’s criticisms that the Federal Reserve was keeping interest rates artificially low to help the election of the President’s preferred candidate—Hillary Clinton.

One does not have to endorse Trump’s claims fully to believe that the degree of independence touted by Brainard is a serious overstatement. As Peter Conti-Brown has shown, the practical independence of the Fed falls far short of its design.

The seven members of the Federal Reserve Board of Governors are nominated by the President and confirmed by the U.S. Senate.  It is true that the full term of a governor is fourteen years and appointments are staggered so that one term expires in each even-numbered year The lengthy terms and staggered appointments are indeed intended to contribute to the insulation of the Board—and the Federal Reserve System as a whole—from day to day political pressures.

But governors almost never serve anything close to their fourteen year terms. The outside options are simply so lucrative that almost everyone resigns after terms far short of that. As a result, today every Governor of the Federal Reserve was appointed by President Obama. Brainard herself is Obama’s former Undersecretary of the Treasury, not to mention a candidate for Secretary of that department in the Clinton administration.  Would we think a Supreme Court was independent of the President if all its members were appointed by him?

To be sure, some regional bank presidents also sit on the FOMC. But the design is that they should be less than a majority of the committee. And the Federal Reserve Governors appoint a third of the directors who choose these bank presidents, including the Chairman and Deputy Chairman of each regional bank.

President Obama has generally appointed inflation doves to the Federal Reserve. That is his prerogative and may well be his monetary philosophy. But it almost certainly does goose the economy in the short term, boosting the chances that he will be replaced by a candidate of his party.  Whether that impetus comes at the expense of long-term growth can be debated.  I believe that our loose monetary policy is pushing up asset prices artificially, increasing the long-term risks of bubbles and thus of panics. It also reduces pressure on the United States government to undertake the entitlement and regulatory reforms that are the best way to accelerate growth for a generation.

I am not at all confident that a President Trump would make sound appointments to the Fed once the current governors leave, as most would pretty quickly on his election.  But his criticism of the Fed, including of its actual independence from this President, is fair comment.

Reader Discussion

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on September 14, 2016 at 14:40:41 pm

Nice! I had no idea that Obama had appointed the entire Fed Board of Governors, or that the regional bank presidents were always a minority of the FOMC. Given these dynamics, I guess Trump’s remarks about the Fed being rigged against him are perhaps slightly less laughable than his remarks that the nation’s electoral system is rigged against him.

Three quibbles:

1. I find it curious that inflation doves would preside over a period of almost no inflation. Maybe they’ve been reckless and lucky. But given a world of uncertainty and trade-offs, being reckless and lucky looks a lot like the definition of being right.

2. Similarly, it seems kind of silly to suggest that Obama has over the course of eight years promoted the health of the economy in a clever ploy to promote the electoral prospects of the next Democratic candidate. This is akin to observing that Obama has adopted policies to discourage a terrorist attack in the US, and characterizing them as policies designed to discourage a terrorist attack in Chicago.

3. Finally, it is not clear to me that the Fed governors would flee their posts if Trump were elected. I see two countervailing considerations.

First, prior governors may have felt free to leave not merely because they were drawn to lucrative alternatives, but because they were confident that competent people would take their place. But if you concluded that you were the last man standing who knew how to hold the rudder during the impending storm, would you be so sanguine about walking away? Moreover, if you concluded that the person holding the rudder during the storm would end up a hero in the econ books, would you be so willing to walk away?

Second, Trump’s economic plans might well crash the economy. Not only would a Fed governor have an opportunity to be a hero during a crisis, but he might lack other lucrative alternatives simply because the economy tanked. A prestigious government job might be the best place to ride out the depression.

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on September 14, 2016 at 18:48:39 pm

"Second, Trump’s economic plans might well crash the economy."

You do, of course, recognize that this is, as with so much other commentary on The Trumpster, PURE speculation.

In any event, it cannot be much worse than it is now - unless The Trumpster decides to do another FDR New Deal!

Then again, there is another possibility: Tank the economy yourself so that blame may be placed on The Trumpster. Did not something like this occur to Bush Pere during election cycle?

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