An Urban's Rural View

Like the '20s of the 21st century, the '70s of the 20th century had an inflation problem. The problem persisted throughout the decade; indeed, it worsened. That was in significant part because early in the decade the Federal Reserve Board chair let himself be pushed around by the U.S. president.

Today's Fed chair is determined not to let that happen again. Avoiding it will require all the political skill and courage he can muster.

Through much of 1971, Fed chair Arthur Burns was telling President Richard Nixon that lowering interest rates in an inflationary economy was a mistake. Nixon persisted for an understandable though perhaps mistaken political reason.

For in addition to inflation the U.S. in the '70s had an uncomfortably high 6% unemployment rate. Nixon was pushing Burns to loosen monetary policy because, anticipating 1972, he judged unemployment a greater danger to his reelection than inflation. When Nixon finally threatened legislation to trim the Fed's independence, Burns folded.

Today the Fed's independence is back in the crosshairs. President Donald Trump lost patience with Fed Chair Jerome Powell not long after appointing him in 2018. He blasted him again the other day.

During a virtual session of the recent Davos forum, the president said he would demand lower interest rates. In a campaign appearance last year, he said the president should have a say on interest rates. Earlier last year some of his advisors prepared plans to put the Fed more under the executive branch's control.

As I noted in a post about those plans last May, every president wants low interest rates. Fearing financial-market pushback, most however seethe in silence when the Fed doesn't give them what they want. Others, Nixon most famously, try to pressure the Fed. (https://www.dtnpf.com/…)

Trump is in Nixon's camp.

The problem with this is that there are times when high interest rates are the painful medicine the economy needs. Without them, inflation can spin out of control, as it did in the '70s. Prolonged inflation can wreak havoc on an economy.

While high interest rates don't win public favor, neither does inflation, which probably cost the Democrats the last election. But the ill effects of inflation might be felt on some other politician's watch, the politician hopes. To the politician, high interest rates and the economic slowdown they bring risk losing the next election.

And that's why Congress took interest-rate decisions out of the hands of politicians and created a relatively independent Federal Reserve Board. It's easier to make the unpopular decision to raise rates if you have a 14-year term as a Fed governor or are president of a regional Federal Reserve bank.

Independence doesn't guarantee mistakes won't be made. It just increases the odds that if they're made, they'll be errors of economic judgment and not attempts to cull favor with voters.

The Fed's independence isn't absolute. Congress could pass legislation undoing it. The president appoints the governors and the Senate approves them. The Fed chair testifies regularly before Congressional committees and answers questions.

But having long terms and being removable only for cause, the governors do have a considerable measure of independence. Like any Fed chair, current chair Powell wants to keep it that way. During his six years as chair, Powell has proved politically astute in dealing with Congress.

Doing the same with this president will prove more challenging.

At their January meeting, the seven governors and five Federal Reserve Bank presidents who sit on the rate-setting Federal Open Market Committee didn't give the president what he said he'd demand. Having lowered their benchmark interest rate a full percentage point since last September, the FOMC voted this time to keep rates unchanged.

At his post-meeting press conference, Powell said the Fed wants to see more progress in reducing inflation toward the Fed's 2% goal before cutting again. To questions about the president's comment that he would demand lower rates, Powell gave uncombative answers.

"I'm not going to have any response or comment whatsoever on what the president said. It's not appropriate for me to do so," Powell said. "The public should be confident that we will continue to do our work as we always have, focusing on using our tools to achieve our goals" -- stable prices and maximum employment.

He said the Fed would continue to make its decisions by studying and analyzing economic data. "Don't look for us to do anything else."

Whether keeping his head down will work for Powell remains to be seen. It's a good start, though.

President Trump has shown he's sensitive to how financial markets react. He might want to keep in mind that if a future Fed rate cut is perceived as caving to his demands, the financial market reaction will be very negative. The markets want an independent Fed.

Urban Lehner can be reached at urbanize@gmail.com

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