Fed Could Hit Back at Trump, a Former Top Official Suggests

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WASHINGTON — A former top Federal Reserve official implied that the central bank should consider allowing President Trump’s trade war to hurt his 2020 election chances, an assertion that drew a firestorm of criticism and a rare pushback from the Fed itself.

William Dudley, the former president of the Federal Reserve Bank of New York and now a research scholar at Princeton University, said in a Bloomberg Opinion piece that “Trump’s re-election arguably presents a threat to the U.S. and global economy.” Mr. Dudley added that “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.”

It is a controversial statement, particularly coming from an official who ranked among the Fed’s most powerful policymakers as recently as 2018. It also comes at a sensitive moment for the Fed, which has been under attack from Mr. Trump and trying to assert its independence from the White House and politics in general.

“The Federal Reserve’s policy decisions are guided solely by its congressional mandate to maintain price stability and maximum employment,” Michelle Smith, a Fed spokeswoman, said when asked about the column. “Political considerations play absolutely no role.”

Mr. Trump has waged a yearlong campaign to pressure the Fed to cut rates, accusing the central bank of hurting the economy by keeping rates too high and putting the United States at a disadvantage to other nations, like China and Germany.

“The Federal Reserve loves watching our manufacturers struggle with their exports to the benefit of other parts of the world,” Mr. Trump said in a tweet on Tuesday. “Has anyone looked at what almost all other countries are doing to take advantage of the good old USA? Our Fed has been calling it wrong for too long!”

The attacks have put the Fed on the defensive, prompting top officials including Jerome H. Powell, the Fed chair, to insist that the central bank sets policy to achieve economic goals without taking politics into account.

The Fed cut rates for the first time in more than a decade in July and has kept the door open to future cuts, with Mr. Powell saying the central bank is prepared to act to protect the economy against slowing global growth and as Mr. Trump’s trade fights stoke uncertainty.

Mr. Dudley essentially said the Fed should wade into politics, arguing that the central bank should consider the political ramifications of the policy decisions it makes. By lowering interest rates to offset economic harm caused by Mr. Trump’s trade war with China, Mr. Dudley said the central bank could give the White House room to ramp up trade tensions.

“The central bank’s efforts to cushion the blow might not be merely ineffectual,” he wrote. “They might actually make things worse.”

Fed watchers responded to Mr. Dudley’s piece with widespread concern, asserting that it could feed conspiracy theories that the central bank is trying to influence political outcomes.

“The Fed for decades has scrupulously avoided doing that, and has tried to avoid giving that perception,” said Adam Posen, the president of the Peterson Institute for International Economics. “And this isn’t some ‘deep state’ fake: They genuinely don’t want to get into it, because ultimately they are accountable to Congress.”

Mr. Trump announced an escalation of the trade war with China just a day after the Fed cut rates in July, and the concern that Fed policy is enabling the tariffs is often repeated by analysts. Michael Strain at the American Enterprise Institute said it was a valid point to raise and consider.

But Mr. Strain pushed back against the idea that the Fed’s policymakers should try to guide political outcomes.

“It’s wildly irresponsible,” he said. “The Fed is not elected; it is appointed. It has a responsibility to adhere to a narrow reading of its mandate.”

The central bank’s leadership consists of 12 regional presidents, who are selected by businesspeople and community leaders from their districts and who share four annually rotating votes on interest rates. The New York Fed president is the most powerful regional leader and has a constant vote on policy.

The rate-setting committee also includes seven governors who are nominated by the president and confirmed by the Senate. Only five of those positions are currently filled, although Mr. Trump has said he intends to nominate another two members to the Fed.

The Fed does not answer to the White House by design: It is removed from politics so that it will make better long-term decisions for the economy, rather than trying to goose the economy going into election years. It is, however, responsible to Congress, which can change the rules that govern it.

That insulation has, historically, helped to fuel criticism that the Fed is removed from the public and in the pocket of bankers. The central bank has long been the target of conspiracy theories, and popular books about it have borne titles like “Secrets of the Temple.”

More recently, the president has placed the central bank firmly in political cross hairs. In a Twitter post last week, he asked whether Mr. Powell or President Xi Jinping of China was a “bigger enemy” of the United States. Mr. Trump has reportedly considered firing or demoting Mr. Powell in the past, and he recently told reporters that he would accept Mr. Powell’s resignation if it were offered.

Despite that pressure campaign, Fed officials have repeatedly pushed back against the idea that they would in any way take the White House’s comments or potential actions into account when setting policy.

“We’re never going to take political considerations into account or discuss them as part of our work,” Mr. Powell said at a news conference in January. “We’re human. We make mistakes. But we’re not going to make mistakes of character or integrity.”