Trump’s Federal Reserve appointments startlingly normal

For a US president who has hired and fired arbitrarily and who has bucked all convention, his attitude to the central bank has been surprisingly reasonable, says Kenneth Rogoff.

In a presidency that has shown little regard for conventional norms, how can one explain Donald Trump’s completely reasonable appointments to the US Federal Reserve board?

The most recent nominations, Columbia professor Richard Clarida and Michelle Bowman, the bank commissioner for the state of Kansas, continue a pattern of choosing seasoned technocrats, beginning, most importantly, with Jerome Powell, the new Fed chair.

If Trump were a normal US president, appointing highly regarded individuals who can ensure effective policymaking would be business as usual.

But here is a president who has often chosen officials with little government experience, and who then seems to task them with creating the most disruption possible.

Yet, for the Fed, Trump, the author of The Art of the Deal, has nominated as vice-chair an academic (Clarida), whose most famous paper is entitled ‘The Science of Monetary Policy’.

You might say that giving Trump credit for maintaining stability at the Fed is like giving high marks for not starting a nuclear war. The idea of central-bank independence has gained enormous traction over the past 30 years, among politicians worldwide.

Not only is it the norm in democracies such as the US, the eurozone, and Japan, but even strongman leaders such as Russian president Vladimir Putin and Hungarian prime minister Viktor Orbán pause long and hard before challenging their central banks. But people forget just how new the idea of central-bank independence is.

The venerable Bank of England gained monetary independence only 20 years ago. Back in the early 1980s, when I wrote an academic paper making the case for independence as a tool to establish central banks’ anti-inflation credibility, one journal after another rejected it.

The referees scoffed at the idea that independence could be more than a meaningless façade, easily pierced by the government.

Which brings us back to Trump.

JUST OUT: 3.9% Unemployment. 4% is Broken! In the meantime, WITCH HUNT!

— Donald J. Trump (@realDonaldTrump) May 4, 2018

Is he just pausing before pressing the Fed to stoke the economy ahead of the 2020 election, and ultimately to monetise the massive deficits wrought by Republican tax cuts?

If that is his plan — and who really believes a cornered Trump would not resort to high inflation? — the good news is that his Fed appointments will not make his life easy.

Trump does appear to understand this. After all, on the campaign trail in 2016, he himself railed against Powell’s predecessor, Janet Yellen, for allegedly holding down interest rates to facilitate Hillary Clinton’s election.

Now, as president, that is exactly what he would like to see in 2020. Interviewing candidates to succeed Yellen, last year, he supposedly asked just one key question: “You aren’t going to raise interest rates and ruin my beautiful stock market, are you?”

True, Trump is somewhat constrained by the need to win Senate approval of his nominations.

In fact, some conservative Republicans have objected to another of his appointments, Marvin Goodfriend, of Carnegie Mellon University, for daring to suggest that the Fed might need a new approach to monetary policy (negative interest rates) to confront the next, very deep recession or financial crisis.

And although someday the Fed will almost surely embrace this advice (I have also published on the issue), Goodfriend’s nomination barely survived the US Senate Banking Committee.

The White House is running very smoothly despite phony Witch Hunts etc. There is great Energy and unending Stamina, both necessary to get things done. We are accomplishing the unthinkable and setting positive records while doing so! Fake News is going “bonkers!”

— Donald J. Trump (@realDonaldTrump) April 30, 2018

But, by and large, the Senate has given Trump what he wants, and many Republicans would have embraced a disrupter — for example, a disciple of Ron ‘End the Fed’ Paul — or another conservative preaching a return to the pre First World War gold standard.

Unfortunately, the battle for the Fed’s independence is far from over. Trump may just be keeping his powder dry until a real conflict erupts. Right now, the Fed’s planned interest-rate hikes are largely prophylactic.

Inflation is rising only very slowly, even as the economy seems to be running red-hot. But the moment of reckoning could still come.

And, assuming that Trump stays healthy, avoids impeachment, and runs again, the last thing he would want in 2019 and 2020 is sharply higher interest rates, an untimely rise in unemployment, and a likely price collapse in his beautiful stock market.

During Small Business Week, we celebrate the great, hard-working entrepreneurs across our country who have started and operate a small business!

— Donald J. Trump (@realDonaldTrump) April 30, 2018

In a crunch, the Fed’s much-vaunted independence could prove more fragile than most people realise. It is not enshrined in the US Constitution, and the president and Congress maintain several levers of control.

An act of Congress created the Fed in 1913, and, in principle, Congress could revamp it, say, by greatly increasing congressional oversight, or by starving it of funding. Indeed, from time to time, bills have floated around Congress that would have done just that.

For now, Fed appointees have been treated almost as well as generals in the Trump universe. True, with ballooning deficits and the approach of the 2020 election campaign, testing times lie ahead.

But, for now, let’s acknowledge that this is one area where the Trump presidency has been almost normal, so far.

Kenneth Rogoff, a former chief economist of the IMF, is professor of economics and public policy at Harvard University.