Gordon L. Weil
As courts deal with President Trump’s executive orders,
people have come to understand that judges make decisions influenced by their
politics. Hardly a news item about a
court decision appears without mentioning the president who appointed the
judge. The underlying message is that Republicans
appoint reliable conservatives, while Democrats name liberals.
If judges don’t perform independently, courts end up looking
partisan, as the Supreme Court does.
Trump spokespersons help promote that belief by attacking judges when
the president’s policies face setbacks.
He thinks judges should follow the lead of the president who picked
them.
Trump is now also trying to bend the Federal Reserve, the
nation’s central bank, to his will. The Fed sets short-term interest rates that
have broad economic effects. He wants lower rates that, he believes, will spur
growth and reduce the interest costs on the federal debt, which has been sharply
increased by his policies.
He focuses on who will be the Fed chair. As with other of his policies, he would go
back to a time when the Fed’s Board of Governors and its rate setting Open
Market Committee, adopted rates set by the chair. Trump believes that a new leader, supportive
of his views on interest rates and even taking direction from him, will be able
to bring down rates.
Just as judges are supposed to reflect the leanings or the
partisan stance of the presidents who appointed them, Trump believes that Fed
governors should similarly follow the election results rather than their
economic analysis. He would like to
easily replace Fed governors, shaping the Board to follow his will.
In effect, the last remaining major “court” would be
stripped of its neutrality. The Fed
makes decisions that affect almost everybody, unlike most legal rulings, so if
it lost its independence, the effect would flow across the entire economy.
The federal government deploys two major tools to influence
the economy. One is fiscal policy, wielded
by Congress and the president, and it focuses on spending and taxes. The other is monetary policy, managed by the
Fed, and it focuses on the value of the dollar, often measured by the rate of
inflation that can gradually reduce its value.
Fiscal policy is meant to be political. Monetary policy, with the goals of taming
inflation and promoting job growth, is supposed to be isolated from politics,
and it usually is protected. As a sign
of its intended independence, Fed governors are appointed for 14-year terms,
thus insulating them from election results.
The Fed is not taxpayer financed. It receives payments from banks and its own trading
in money markets. It is a combined public-private
entity, acting independently in line with the judgments of the governors and
the presidents of the regional Fed banks, who are chosen by their own boards.
This is the system that Trump wants to change. It has generally worked well, though possibly
moving slower or faster than would be ideal.
It has tried to keep interest rates low and employment high, both part
of congressional mandate.
In a rare break from Fed neutrality, President Nixon, facing
reelection, induced its chair to lead the Fed into cutting interest rates. The result was raging inflation. Soaring interest rates were halted under a
new Fed chair, using astronomical interest rates and causing a recession. President Reagan reaped the political reward
for the ultimate recovery.
The Fed no longer works that way. Trump has attacked Fed chair Jerome Powell,
his own pick for the job, for not cutting rates. The president may fail to understand that the
chair no longer calls the shots. Votes
on rates by the Open Market Committee, composed of Fed governors and selected
regional Fed bank presidents, are public, but Trump seems to ignore them.
Last week’s vote showed a three-way split. The majority,
including Powell, supported a small rate reduction; some opposed any reduction;
one wanted a bigger cut. Trump wants next
year’s new chair to lead the Fed into making deep cuts. But his appointee is likely to prove as
independent as Powell. And Powell could
remain on the Board as a governor.
While the Supreme Court has supported stronger executive
power for Trump by allowing him to fire independent agency members, it seems
ready to protect the Fed. It recognizes
the intent, virtually from the outset of the country, to have an independent
central bank. So does Congress.
Both understand that the independent Fed has given the world
a currency of reliable, long-term value.
The U.S. dollar is recognized as the principal reserve currency by other
countries and businesses around the world.
Trump’s own National Security Strategy would retain the dollar’s role.
In the end, Trump’s effort to have his new chair seize Fed control
is likely to amount to nothing more than futile and distracting bluster.
