Robert Rubin was never my favorite Wall Street-White House insider, since he and others like him tore apart the financial regulations that eventually contributed to the severity of the 2008 crash. So, yes, I blame him for using his position as Treasury Secretary to push through excessive deregulation, damn the risks.
But Rubin does make a good point in the Times yesterday about Fed independence, “Don’t Politicize the Fed.”
A quick reminder—in recent decades Presidents treated the Fed with respect:
President Reagan reappointed Volcker, first appointed by Democratic President Carter;
President Clinton reappointed Greenspan, first appointed by Republican Reagan;
President Obama reappointed Bernanke, first appointed by Republican Bush.
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But in the last election, Trump has said he would not reappoint Fed Chairwoman Janet Yellen simply because she is … not Republican. Yesterday, in a Wall Street Journal interview, he changed his mind saying he would now consider it. That is a relief if it were believable—a relief in the sense that Fed independence is an admirable goal (not always achieved in practice).
The Fed was not always independent. That came about only after hard-fought battles. Used to be, when the Treasury had lots of debt to sell, the Fed was “obliged” to buy it up, at least at first, to ease the new issue into circulation. But this meant the Fed had no ability to conduct an independent monetary policy.
In an historic Accord in 1951, the Fed finally broke free from the manacles of debt servicing. This is the start of Fed independence.
But I can imagine a scenario in which, with three Board of Governor positions open in Washington, Trump could throw a political bomb into the institution by appointing party hacks to the vacancies.
Given Trump’s propensity to see everyone as either with him or against him, a friend or a foe, wouldn’t he also perceive the Fed in the same light? If so, he might think that its goals should align with his goals. To achieve Trump’s heroic growth targets in the midst of rising fiscal deficits and rising interest rates, this could mean strong-arming the Fed to lower interest rates in the short run, even though this would jeopardize inflation and the Fed's long-term credibility.
Frankly, this worries me more than the threat of North Korea, but I haven’t seen today’s CIA briefing….