Imagine an organization that can grow an economy as fast it can destroy it. This institution can make presidents kings and then transform them into court jesters. The smartest men in a room situated on 2051 Constitution Ave can choose to increase the value of money in your wallet or make it worth less than single-ply generic brand toilet paper.
Well, this is not a fictitious body found in a dystopian novel. It is right here in the real world. It is the Federal Reserve System. Cue The Twilight Zone theme song.
Burning Down Trump White House
Former New York Fed Bank President William Dudley recently penned a scathing op-ed on Bloomberg News titled “The Fed Shouldn’t Enable Donald Trump.” Dudley wrote that the central bank should refrain from bailing out Trump on the economy. He believes that the Eccles Building must cease enabling the administration by accommodating policy to Trump’s whims, otherwise, he warns, the country risks re-electing the president next year.
Dudley, who served as NYFRB head from 2009 to 2018, stated that his former employer needs to avoid coming to the president’s aid in his trade war with China. The tit-for-tat dispute has escalated over the last month, though both sides are ostensibly returning to the negotiating table. He explained that the Fed needs to send a clear message that it is Trump, not the Fed, bearing the risks and responsibility of the prolonged trade spat.
But the biggest revelation in Dudley’s piece is how far some people would go to stop Trump earning a second term.
“After all, Trump’s reelection arguably presents a threat to the U.S. and global economy, to the Fed’s independence and its ability to achieve its employment and inflation objectives. 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.”
This essentially hints that Fed monetary policy can pick US presidents.
A Nation Reacts
The Fed issued a statement responding to the remarks, noting that it does not use politics as a guide for its decisions. A spokesperson confirmed that it only operates based on its congressional mandate to ensure maximum employment and maintain price stability.
Observers say that Dudley’s comments are inappropriate, and it will be difficult for the incumbent Fed leadership to overcome his proposal when the people are losing confidence in conventional institutions.
While Trump has not tweeted about it, he has continued his lamentations on the central bank. He recently tweeted that the “No Clue FED!” is unable to “mentally keep up” with the other G7 economies.
Soon after the opinion piece was published, Sen. Thom Tillis (R-SC) announced that he will request the Senate Banking Committee to launch a probe into the Fed’s independence. He plans to ask committee chairman Sen. Mike Crapo (R-ID) to convene a hearing about “Fed independence and the danger of this institution taking unprecedented and inappropriate steps to meddle in the presidential election.”
He also told Politico:
“I am very disappointed that former Fed monetary Vice Chairman Bill Dudley is lobbying the Fed to use its authority as a political weapon against President Trump. The President is standing up for America against China after 30 years of our country and our workers being ripped off and there is now an effort to get the Fed to try to sabotage the President’s efforts.”
The senator, who is up for re-election in a swing state next year, should not be surprised.
Independence is a Myth
Why nobody suggested an investigation decades ago into the Fed’s independence is befuddling.
Despite the mainstream media pearl-clutching about the Trump administration undermining the Fed’s independence, the reality is that it is about as independent as a Greenwich Village hipster following the herd. Liberty Nation has thoroughly documented the cordial and cooperative relationship between the Fed and the White House since the 1930s.
When former President John F. Kennedy requested the central bank to speed up the printing press, Fed Chair William Martin acquiesced, and the national money supply grew by 3%. Former President Richard Nixon wanted to fight stagflation and make inflation seem less intimidating, so Arthur Burns ballooned the money supply by 10% and established the “core” inflation rate. Former President Barack Obama needed to stimulate the economy, so the Fed monetized the debt and expanded its balance sheet to the tune of $4.5 trillion.
But it is a little bit different this time. Now, there might be a civil war brewing inside the Federal Open Market Committee (FOMC): One side may be persuaded to sabotage the president’s re-election bid and the other may heed Trump’s tweets and slash interest rates. The latter seems to be what is occurring with Fed funds futures traders betting on more rate cuts over the next 12 months.
Indeed, the most likely scenario is something similar to that of former Fed Chair G. William Miller, who served under President Jimmy Carter. Miller, an expansionist and inflationist, presided over an exploding money supply that saw the inflation rate reach 14%, causing his successor, Paul Volcker, to dramatically raise interest rates.
The Most Awesome Monetary Force
No matter what happens, it is frightening to know just how much power the Federal Reserve holds. In the US, it is said that the White House is the most powerful office in the land. Considering that the central bank can make or break economies, select presidents, and destroy the value of money, the Federal Reserve is really the most formidable force in the world. Be afraid. Be very afraid.