For more than a generation, the Federal Reserve has floated above politics, even as partisan conflict has consumed other public institutions. Republican chairmen, including incumbent Jerome Powell, have run the Fed for 28 of the last 32 years, yet you’d struggle to find a trace of monetary favoritism when Republicans occupied the White House.
That political appointees have behaved so apolitically is not a law but a norm taken for granted by both parties—until now. At first, President Trump observed that norm: His Fed appointments were praised as qualified, competent and apolitical, including Mr. Powell, at the time a sitting governor. But he is now breaking from that norm. He has publicly attacked Mr. Powell for raising interest rates and has proposed naming to the Fed two loyalists who share his views.
It takes more than just a president to politicize the Fed: Its chairman and Congress must also acquiesce. For now, Mr. Powell and his current colleagues seem unlikely to be swayed. The real test is whether Congress is prepared to let Fed appointments become, as they are with the Supreme Court, a tool of partisan advantage.
.. Mr. Trump’s two proposed nominees have drawn criticism over their qualifications.
Stephen Moore has a degree in economics, and
Herman Cain was a successful businessman, but
neither has worked in finance, or has a deep grasp of monetary policy. (While Mr. Cain chaired the board of one of the Fed’s 12 reserve banks, that position carries no monetary responsibility.)
Their main qualification is that they are vocal advocates for Mr. Trump. Mr.
Moore this week said the Fed may be endangering Mr. Trump’s re-election prospects with tight monetary policy.
.. If they don’t agree, they’ll be just two votes on the seven-member board of governors that, along with five of the 12 reserve bank presidents, decides monetary policy, usually by consensus. Two dissidents can make life hard for the chairman, with critical speeches and media appearances. But if their arguments aren’t credible, they won’t sway any other members. Indeed, other officials may draw closer to Mr. Powell out of solidarity…
Historically, only the Fed chairman can bend policy to a president’s wishes. Arthur Burns did so for Richard Nixon in the early 1970s because
he saw himself as part of Mr. Nixon’s team.
Ronald Reagan appointed four governors who in 1986 briefly approved a rate cut over the opposition of then-chairman Paul Volcker. When Mr. Volcker stepped down the next year, Mr. Reagan named Alan Greenspan, a longtime Republican insider, to succeed him. But Mr.
Greenspan proved as independent as Mr. Volcker, repeatedly defying White House pressure to keep rates down. From 1993 until last year, presidents stopped trying.
.. Mr. Powell has said he would not resign or change course just to please Mr. Trump. Yet that alone may not be enough to insulate the Fed. Governors frequently resign before the end of their terms. If just two do, Mr. Trump can name enough loyalists to outvote Mr. Powell on the board, significantly undercutting his authority. And in 2022, Mr. Powell’s term as chairman is up. If Mr. Trump is re-elected, his recent behavior suggests he will look for a chairman who puts the White House’s agenda first. If a Democrat is president, he or she may do the same. If Mr. Trump tries to force Mr. Powell out before his term ends (legally, he can only be fired for cause), the Senate would have to confirm his replacement, perhaps with Mr. Trump’s re-election at stake.
For this to happen, senators would have to knowingly confirm nominees picked for their loyalty rather than their qualifications. It isn’t far-fetched. Senators once confirmed judges based on their qualifications, but today ideology is as important, and often more so.
In the wake of the last recession, Republicans regularly attacked the Fed’s efforts to stimulate the economy for supposedly fueling inflation and enabling Barack Obama’s deficit spending (there was no evidence for either). Mr. Moore and Mr. Cain piled on. Some pushed legislation to curb its independence. In 2011 Richard Shelby, a top Republican on the Senate Banking Committee, blocked Mr. Obama’s appointment of Peter Diamond, a Nobel Prize-winning Ph.D. economist, to the Fed because he lacked “the appropriate background, experience or policy preferences.”
In contrast, Mr. Moore, despite a lack of formal qualifications, is widely liked by Senate Republicans for his decades of tireless campaigning for lower taxes. Mr. Shelby recently said: “He will be a new voice on the Fed; I believe the Fed could use a voice like that.”