The names Joe Biden and Donald Trump are scarce on the website of the Federal Reserve. When they do appear in a document, it’s rarely something said or written by a Fed governor or staffer. If the occupant of the White House is mentioned at all, it’s generally as “the president” — a role, not a person.
In contrast, A.W. Phillips, a defunct economist from New Zealand who gave his name to the Phillips curve, which compares inflation and unemployment, is all over the Fed website — “Your query for ‘A.W. Phillips’ matched 84,826 documents,” I was informed on Tuesday.
I say this to emphasize that America’s central bank tries to stay miles away from partisan politics. But that’s not entirely possible. The Fed can swing the economy, and the economy can swing elections. President George H.W. Bush blamed Federal Reserve Chair Alan Greenspan for costing him re-election in 1992. “I reappointed him, and he disappointed me,” Bush told an interviewer years later.
Things are more fraught now than in 1992. Guarding its political independence, the Fed is conducting monetary policy without regard to its effect on the 2024 presidential election. That’s business as usual. But there’s nothing usual about this election because there’s nothing usual about Donald Trump, the likely Republican nominee.
Trump attacked the Fed repeatedly during his four years in office, questioning why it wouldn’t do his bidding. It’s easy to imagine that Trump would step up the attacks in a second term, and seek to replace Fed governors with more pliable ones.
In other words, the Fed’s very effort to assert its independence could kick off a chain of events that would damage that independence.
I saw this line of thinking in a piece last week by Beacon Policy Advisors, an independent policy research firm. So I called up Stephen Myrow, the managing partner there. He is a lawyer who served as a senior member of Treasury Secretary Henry M. Paulson’s team during the 2008 global financial crisis.
“I came up with the idea while walking my dog about six weeks ago,” Myrow told me. [Note to self: Get a dog.]
Myrow said Jerome Powell, the current Fed chair, is deeply committed to ignoring political considerations. You can imagine another chair who would try to guard the Fed by subtly taking actions that might keep Trump out of office, but that’s not the way Powell thinks, Myrow told me.
“He would say, ‘That’s beyond me,’” Myrow said.
Trump chose Powell for a four-year term as Fed chair that began in February 2018 but Trump soon turned against him. “He was supposed to be a low-interest-rate guy. It’s turned out that he’s not,” Trump told The Wall Street Journal that October. In 2019, he announced he would nominate Judy Shelton, an economist who has spoken favorably of returning to the gold standard, for a seat on the Board of Governors.
Dropping their customary reticence, a group of Fed alumni urged the Senate to reject the nomination, calling her views “extreme and ill-considered.” In a news story, The Times wrote that “Ms. Shelton has been so forward in her support for Mr. Trump — and so skeptical of the Fed — that it has caused some to worry that she would undermine the institution.”
In the end, Shelton’s nomination failed to advance. But in a second term, Trump might very well renominate Shelton, Myrow said. And this time she might get the job, he added, because the Republican Party has moved in a Trumpian direction since 2020. “In a Republican-controlled Senate, there would not be a large enough group of members willing to cross a vindicated Trump and block a controversial nominee,” Beacon’s piece said.
Trump could even try to get Shelton installed as the Fed chair. Powell’s second four-year term at the helm (for which he was chosen by President Biden) expires early in 2026, squarely within what would be Trump’s term.
It’s easy to forget now, but Trump was somewhat constrained in his first term by mainstream advisers and cabinet members, such as Gary Cohn, the former Goldman Sachs president who served as Trump’s first National Economic Council director, and Steven Mnuchin, a financier who hung on as Treasury secretary for all of Trump’s four years in office.
“There’s going to be no guardrails around Trump if he’s back in,” Myrow said. Bloomberg reported in September that conservative Republicans are making plans so that Trump could come to the White House for a second time “as one of the most prepared Republican presidents to remake the federal bureaucracy in his own image.” The Times reported Wednesday that Trump allies are “preparing to populate a new administration with a more aggressive breed of right-wing lawyer, dispensing with traditional conservatives who they believe stymied his agenda in his first term.”
Undoubtedly, Powell and other Fed officials have thought all this through. But there’s no hint that it’s affecting their decision-making even a little. If anything, Fed policy may be overly restrictive, as I’ve written more than once. The Federal Open Market Committee has raised its target range for the federal funds rate by 5.25 percentage points since early 2022. On Wednesday it announced it would keep the target unchanged for now.
True, the economy grew at an annual rate of 4.9 percent in the third quarter, according to the government’s advance estimate, but there’s mounting evidence that it will slow significantly in the year of the election, jeopardizing Biden’s chances.
A recession in an election year is very possible. At this stage in the campaign, “I would probably rather be Biden than Trump,” Myrow said. “But I wouldn’t be sleeping easy.” Powell may not be sleeping easily, either. But don’t expect him to talk about it.
Elsewhere: Why People Aren’t Moving
The standard explanation for why people aren’t selling their houses and moving — as I’ve written — is that they don’t want to swap the cheap mortgages on their current homes for high-rate loans on new places. But that’s not the only reason, housing experts at Fannie Mae, the big mortgage securitizer, blogged on Monday. In a survey, Fannie Mae found that people with mortgages were no more likely than people without mortgages to say they plan to stay in their homes longer than originally intended.
Also, “While mortgage borrowers indicated that being ‘locked in’ to a low mortgage rate was the leading reason for staying longer in their homes (21 percent), there were other reasons close behind, including that they like their current home (19 percent) and that home prices are too high to buy another home (13 percent),” wrote Mark Palim, the deputy chief economist, and Rachel Zimmerman, the housing survey lead.
Quote of the Day
“Too weak the markets and society becomes unproductive, too weak a community and society tends toward crony capitalism, too weak the state and society turns fearful and apathetic.”
— Raghuram Rajan, “The Third Pillar: How Markets and the State Leave the Community Behind” (2019)