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Comment: The ongoing challenge to maintain Federal Reserve independence in word and deed

It is a shame and a reality in the present political climate that the nation’s central bank needs to defend its independence repeatedly and forcefully.

President Trump’s willingness to put aside norms includes vocal opposition to Federal Reserve monetary policy when it is contrary to his own views. It is also the nature of his disruptive style that his opposition raises concerns of possible direct interference with Fed policymakers and decisions.

Rumors that he was exploring removing Chair Jerome Powell back in December provoked a backlash that had to be quashed by statements from White House spokespeople that that was not the case.  Trump remains unhappy with past and possible future rate hikes, but direct intervention with the Fed is not a battle that would please markets.

However, in the present charged environment, the shift in FOMC communications and comments from various Fed policymakers indicate that expected further increases in short-term rates are likely to be more distant and perhaps spread out further. Inevitably, there is speculation that the Fed is bowing to political pressures. (For example, see the February 3 opinion piece by Robert Samuelson in the Washington Post.)

Thus, a dinner between Trump, Treasury Secretary Steven Mnuchin, Powell, and Fed Vice Chair Richard Clarida on Monday, February 4 – rather than the usual sort of breakfast or lunch meeting, but not unprecedented – requires a statement out of the Fed that talk was confined to “the outlook for growth, employment and inflation,” and that monetary policy was off the table “except to stress that the path of policy will depend entirely on incoming economic information and what that means or the outlook.”

It seems to me that Powell could not have made a clearer statement about the independence of the central bank and his willingness to defend it than the quiet, but flat “no” on January 4 about whether he would resign if asked by President Trump.

It would be naïve to think that the Fed is immune to political pressure, but it has a very high resistance that needs more than presidential discontent to overcome. At present, the composition of the Board of Governors is such that Trump’s ability to exert personal influence is low. Even if the two empty seats are filled by clear Trump loyalists – an unlikely event given visibility of the Senate confirmation process and Trump’s inability to appoint acting Governors – there still the 12 District Bank Presidents (of whom five are FOMC voters) to more than offset outside influences.

Reassuring the public and markets that the Fed will stick to the data and make policy based on the economic data will remain a challenge, and one that the Chair and other Fed officials will not cease to meet.

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