Sticks and Stones Monetary Policy

I was having one of those weeks when it seemed like there wasn’t anything to say in the macrosphere. And then Fed Vice Chair William Dudley piped off enough to warrant an article about him in the WSJ (8/28/19) titled “The Federal Reserve Resistance.” Thanks Mr. Dudley. You made my day.

When I was a kid in the olden days our parents didn’t want us to get into fist fights. If someone said something nasty to us, we were told to say – “Sticks and stones will break my bones but words will never hurt me.” If anything, we should have learned this about Donald Trump. He says and tweets a lot of words. And often the words have no real meaning. He blurts and blurts. Most of us have learned to just ignore all that blather. Your grandma wears combat boots. Your Dad has a long nose. Your butt is bigger than Mt Everest. Most of us ignore stupidity.

That’s what is so surprising about Mr. Dudley. I am sure he has a PhD but I refuse to call him Dr. until he acts like one. He is acting like a school child and that’s okay for him – but he is ruining our understanding of the Fed’s role and in so doing proposing ridiculous policies.

The Fed is independent of the President and mostly from Congress. The President can nominate people to the Fed’s governing board when openings arise as in the Supreme Court. Congress can approve or disapprove of these nominees – and Congress always can write a new banking law that changes the operating rules at the Fed. But these options do not give the President or Congress the right to tell the Fed what to do insofar as ongoing monetary policy concerns.

As such, the Fed does what it wants to do. Trump or Pelosi or whoever can make speeches and write articles criticizing the Fed, but it doesn’t change a thing at the Fed. The Fed is usually smart enough to wear blinders or earplugs – but not Mr. Dudley. He makes up a fiction that the President is overstepping his duties. We all know Donald Trump. He runs his mouth a lot. Most of us ignore most of it. Why doesn’t Mr. Dudley do the same? 

Trump can talk all he wants but the Fed is independent. Trump can pressure the Fed to lower interest rates and previous Presidents have done similarly, but that doesn’t mean the Fed has to comply. I can remember many speeches by Arthur Burns wherein he basically turned the tables and told the President that if he did a better job at fiscal policy he wouldn’t need to pressure the Fed.

Instead Mr. Dudley wants to overthrow the President in the coming election. Really? Is that an independent Fed? Mr. Dudley even said the Fed could bring this about by not following Trump’s orders – and thereby pushing the economy into a recession. Mr. Dudley implied that recession might influence voters to get rid of President Trump. Wow. Crazy stuff. The Fed is just making things worse with this war of words.

If you read this blog you know I agree with the idea that the Fed should not lower interest rates. So it appears that I agree with Mr. Dudley about the direction of Fed policy. But when he gets too political and he says the Fed should induce a recession for political purposes -- he crosses the line. Instead Mr. Dudley could try to educate people about Fed independence and he could explain why a good Fed policy probably would NOT cause a recession...even if it means raising interest rates a tad.