Financial History Issue 131 (Fall 2019) - Page 20

US Presidents HHH and the HHH Federal Reserve By Peter C. Earle In late August 2019, Bill Dudley, former President of the Federal Reserve Bank of New York and Vice Chairman of the Federal Reserve Open Market Commit- tee, wrote an unprecedented editorial in Bloomberg Magazine. In it, he took to task President Donald Trump’s badgering of central bank officials via Twitter and urged current Fed Chairman Jerome Pow- ell not to “enable” the President’s policies. A former Fed official taking the Chief Executive to task is extraordinary, but the circumstances under which it occurred seems equally so. Since April 2019, Trump has made no less than 37 tweets criticizing the Fed’s implementation of monetary policy and has made numerous other comments via the media. The New York Times has decried Trump’s media attacks on the Fed as “highly unusual.” USA Today has said that in directing comments at the Fed regarding their policies, Trump has “br[oken] long- standing taboo[s].” And the Washington Post laments that the 45th US President had “violate[d] another Presidential norm.” In fact, the current President’s com- ments only qualify as unusual on account of their directness and don’t (really) break any long-standing codes of conduct. Instead, they call attention to one of the most sturdily-held shibboleths of Ameri- can domestic policy: the independence of the United States Federal Reserve Bank. While it ostensibly “make[s] monetary policy independently of short-term politi- cal influence,” the Fed—by virtue of its structure, mission creep and the nature of its particular “policy lever”—is inevitably thrust into the political sphere. Going back to the 1920s, American Pres- idents have both explicitly and implicitly requested, cajoled and even threatened the central bank’s officials. At times, Fed officials have resisted those overtures, and at other times they seem to have acceded to those demands. A Labyrinthine Organizational Structure The Fed’s very organizational structure— initially designed and modified over time to placate various public and private inter- ests—subjects it to regular engagement with political and private interests.  • Fed officials are appointed by the Exec- utive Branch and confirmed by Con- gress; many rise to prominence through positions at the US Treasury or on the Council of Economic Advisors; • Private meetings between the Fed Chair- man and Presidents are a long-standing fixture of economic policy coordination and implementation; • The Fed Chairman and other Fed offi- cials testify publicly before Congress twice every year, which includes a sometimes-contentious question-and- answer session; • Leadership at the 12 regional Federal Reserve Banks are made up of appoin- tees of the member banks which essen- tially own them; not by the President or Congress, but by regional bankers and business executives. (Historically, they tend to be more hawkish than the seven governors of the Federal Reserve, who are appointed by the President and confirmed by the Senate); • In times of war, disaster or under other unusual circumstances, the Fed is expected to work closely with the US Treasury and other government agen- cies to coordinate monetary, fiscal and other policy initiatives. 18    FINANCIAL HISTORY  |  Fall 2019  | Even with this mixed private-public structure, the Federal Reserve was par- tially immune to the full range of political manipulation for its first six decades by virtue of the gold standard: with the gold price pegged amid the international sys- tem of fixed exchange rates, Fed control of the growth of the money supply was bound. But with the end of the dollar’s convertibility to gold in 1971, and thus the end of exposure to market discipline, the way was paved for the potential politiciza- tion of the Federal Reserve. A Century of Mission Creep Upon its founding in 1913, the Federal Reserve’s exclusive mandate was to pre- vent financial panics and bank runs. This was the case until 1946 when, inspired by both the Great Depression experience and millions of veterans returning to the workforce from foreign battlefields, Con- gress passed the Employment Act. This added to the Fed’s mandate the requirement that monetary policy be con- ducted in a way that promotes “conditions under which there will be afforded useful employment opportunities…and to pro- mote maximum employment, production and purchasing power.” The 1978 Full Employment and Balanced Growth Act (“Humphrey-Hawkins”) added “reasonable price stability” to the Fed’s mandate, additionally requiring that the Board of Governors conduct monetary policy in a way that “maintains long-run growth,” that they transmit a monetary policy report to Congress twice a year and that they conduct monetary policy in conjunction with, and in support of, the economic policy and goals of the Execu- tive Branch. (It has been suggested that the addition of financial stability to the Fed’s