Can the Federal Reserve Stay Neutral?

 

We live in hyperpolitical, polarized times – an era of finding someone to blame, especially if you can taint a political opponent while creating a cause for yourself. Inflation is a wonderful arena where the party in power, particularly the incumbent president, gets the blame for what neither the Congress nor the President can control. Like the price of oil… anywhere. That’s a global pricing structure more under the control of OPEC+… even though today the US is the leading producer of oil. We also cannot control price increases due to conflicts far from our shores (like Ukraine), Acts of God (like hurricanes taking down refineries), pandemics, severe damage to ports and major canals and other supply chain issues.

But these days, inflation is in the political crosshairs of the MAGA GOP. Even as bank rate interest rate (what big banks have to pay to get money from the Fed) is exclusively controlled by the Federal Reserve, to keep the Fed independent, Congress created a “government corporation” (the Federal Reserve) where its board and chairman are appointed by the President and confirmed by Congress, but once appointed are totally independent of either. A 14-year term for board members hammers that home.

So perhaps it is useful to address exactly what the Federal Reserve is and what it can do. According to Investopedia, “The 1913 Federal Reserve Act, signed into law by President Woodrow Wilson, gave the 12 Federal Reserve banks the ability to print money to ensure economic stability. The Federal Reserve System created the dual mandate to maximize employment and keep inflation low. The Federal Reserve was thus given power over the money supply and, by extension, the economy. Although many forces within the public and government were calling for a central bank that printed money on demand, President Wilson was swayed by Wall Street arguments against a system that would cause rampant inflation. So the government created the Federal Reserve, but it was by no means under government control.”

Wikipedia adds: “The Federal Reserve System is composed of several layers. It is governed by the presidentially-appointed board of governors or Federal Reserve Board (FRB). Twelve regional Federal Reserve Banks, located in cities throughout the nation, regulate and oversee privately-owned commercial banks. Nationally chartered commercial banks are required to hold stock in, and can elect some board members of, the Federal Reserve Bank of their region…

“Congress established three key objectives for monetary policy in the Federal Reserve Act: maximizing employment, stabilizing prices, and moderating long-term interest rates. The first two objectives are sometimes referred to as the Federal Reserve's dual mandate. Its duties have expanded over the years, and currently also include supervising and regulating banks, maintaining the stability of the financial system, and providing financial services to depository institutions, the U.S. government, and foreign official institutions. The Fed also conducts research into the economy and provides numerous publications…”

And right now, we have low unemployment, and after almost two decades of low Fed rates, to counter inflation, the Fed sequentially rates their bank to over 5%. Even as they pledged to begin lowering that rate again, so far, nothing has happened. Fed Chair, Jerome Powell (pictured above), was appointed by both Trump and Biden.

So, raising rates further would truly push the nation towards recession, while lowering the rates would drop consumer costs and reignite a wallowing real estate industry, where housing affordability is a major issue, particularly for younger (and more likely Democratic) voters. As Jeanna Smialek, writing for the April 3rd NYTimes The Morning, notes, this makes the Fed a bit more political than they would like: “The Federal Reserve is in a tough spot. It expects to cut interest rates soon. But doing so before an election will yank the apolitical central bank directly into a partisan fight.

“Fed officials have lifted borrowing costs to 5.3 percent, the highest level in decades, to slow inflation. Now that price increases are fading, Fed officials think that they can dial back that response starting later this year. Investors expect the first move to come in June or July — just as the election kicks into high gear.

“Donald Trump, the presumptive Republican nominee, says rate cuts this year would probably be an effort to help Democrats. Lower rates can lift markets and help the economy, so politicians tend to prefer cheap money when they are in office.

“Fed officials insist that rate changes would respond to economic conditions, not politics. Still, they can’t ignore the vitriol. If they ramp up during the campaign, Trump’s attacks could convince his supporters that the Fed is bending to partisan whims. And in the long run, a loss of popular support could expose the central bank, which answers to Congress, to lawmaker censure or even political tinkering…

“But even if elected officials shape [the economy], the Fed is insulated from immediate political backlash as it sets actual policy. That is because its big job — controlling inflation — can be very unpopular in Washington. Its efforts have been blamed for slowing the economy severely enough to harm or even doom both Jimmy Carter’s and George H.W. Bush’s re-election attempts. In fact, incumbent politicians used to frequently harangue Fed chairs for lower interest rates in public and in private. (Lyndon B. Johnson reportedly cornered his Fed chair against a wall at his Texas ranch.).”

With Trump as the master of blame, clearly, he is directing that negative blast solely at Joe Biden, who has little more than a jawbone impact on the Fed.” The Fed is aware of the conundrum, but one would hope they do what best for the nation without political bias. Hope!

I’m Peter Dekom, and fairness, logic and even tsunamis of facts don’t seem to sway people looking for simple answers and expansive blame.