The Federal Reserve is in
the spotlight as 2024's election approaches. The Fed will act during
presidential election seasons. The question now
is will the Fed Act if the case is marginal? If you spoke to any Federal
Reserve chair, they would tell you that they make
their decisions based on what's right for the
economy, not on the election cycle. Read all the transcripts and
see if anybody mentions in any way the pending
election. It just isn't part of our
thinking. It's not what we're hired to do. Inflation is the chief
concern of U.S. adults, according to a May
2024 survey. But stabilizing prices is
traditionally the Fed's job, not the President's. My plan is to address
inflation. It starts with a simple
proposition: Respect the Fed. A long line of experts say
that presidents should avoid meddling in the central
bank's affairs. They are one of the most powerful
institutions, probably in the world. An executive's ability to
control the power of the purse could one day lead us
down to a president who would be more like a king. Former President Donald
Trump is reportedly considering how to exert
more influence over the fed. Irrespective of Donald
Trump's plans about what to do with the Fed, there is a
concern that any future president might be tempted
to influence the Fed because of the US's fiscal
position. So how does the fed factor
into the 2024 election? A committee at the Federal
Reserve makes decisions that can influence how voters
feel about the economy. For that reason, they're
supposed to be independent and far away from politics. And most studies show that
more independence from the Federal Reserve leads to
better monetary policy. Central bankers at the Fed
are not elected. They can't be easily fired
by the executive branch, and they can't be easily
influenced by the president. Members of the Board of
governors have 14 year terms, and this is to
protect independent judgment. That said: Appointments at the fed are
certainly getting very politicized in recent
years. Seven governors on the
Federal Reserve Interest Rate Committee are
nominated by the president and confirmed by Congress. And then five reserve Bank
presidents, those reserve Bank presidents, it's going
to be the New York Fed president and four other
reserve Bank presidents who kind of rotate through. In 2024, Four of the sitting members
were nominated by President Biden, two were nominated
by President Trump, and the chair, Jerome Powell, was
approved by leaders from both parties. The fed chair is not really
a political appointee. It's pretty typical that
even if you have presidents from different parties,
they'll still reappoint the same person as the fed
chair. If this became a tool of
politicians, then of course what they're going to do is
they will want to lower interest rates now, because
low interest rates are like dessert before dinner. They always taste pretty
good, but then you have to deal with, you know,
actually getting some nutrition. From 2022 to 2023, the
Federal Reserve took its interest rate from near
zero to above 5%. The committee believes this
level is working to reduce inflation. You see it in the labor
market. You see it in inflation sensitive
spending, where demand is clearly come down a lot
over the past few years. Sometimes, like in the
post-pandemic era, central bankers use higher interest
rates to restrict economic growth and prevent prices
from climbing so quickly. We've been going through a
period of history where the fed has been pretty rapidly
rising rates, and we hadn't seen anything like that in
a number of decades. These higher interest rates
that we've been experiencing for the past two years or
so make the cost of money and credit more expensive. But sometimes politicians
may pressure the central bank to cut its interest
rates. Politicians, they know this
might have an inflationary impact, but if they are a
few months away from the election, then they think,
okay, let's stimulate activity. Some past presidents have
pressured the fed to lower interest rates, even if
that would be a dangerous decision. The most notable
example came under President Nixon. We must stop the rise in the
cost of living. So the relationship between
President Richard Nixon and Fed Chair Arthur Burns is
probably the best known historical example of
presidential pressure on a fed chair. Nixon appointed Burns in
1969 because he expected that Burns was going to be
a Republican Party loyalist. Take, for example, this
conversation from December 1971, 11 months before the
next election. Chair Burns says to Nixon. Look, I wanted you to know
we reduced the discount rate today. To which President Nixon replies: Oh, Yeah, yeah, yeah. Good. You can lead them,
you know. You know, you always have
now. So just just kick them in
the rump a little. Nixon also put artificial
controls on wages and prices to guide the consumer
economy. He went on to win 1972's
election, commanding 60.7% of the popular vote. Of course, after the price
controls were lifted, all of that monetary easing led to
this big burst of inflation. It's sort of gone down in
history as a nightmare for central bank independence. Nixon famously resigned from
the presidency amid the escalating Watergate crisis
in 1974. At the same time, inflation
was running rampant, rising 10% from the year before. Presidents beyond Nixon may
have pressured the fed for political gain. The variation in these
meetings is enormous. For example, former
President Clinton met only six times with people from
the Federal Reserve. For Nixon, that count was
160. The consequences were almost
always negative. I find little evidence that
the pressure affects real activity. So while it
increases prices, it actually does not stimulate
the economy. But frequently conditions
within the economy may call for fed action even in an
election year. So we looked at 34 years of
data going back to 1989. The fed will react to
shocks that hit the system. In both the great financial
crisis and the pandemic, both had a banking and
financial element. To them, the case for
cutting was very obvious and not very controversial. As recently as March, the
Federal Reserve signaled that it would cut interest
rates three times in 2024. But as the summer
approached, the central bank hedged on its forecast of
lower interest rates because annual inflation hadn't yet
slowed to their target rate of about 2%. I think keeping the policy
rate where it is, it's restrictive. That will
continue to sort of slowly grind down the economy but
not throw it off a cliff. The current state of the
economy could play a big role in the election. Wages keep going up. Inflation keeps coming
down. Inflation has dropped from 9% to 3%, the lowest
in the world, and tending lower. Inflation has been falling. It's just always really
hard to tell because interest rates kind of work
with a lag. We don't know exactly how
long it takes for their effects to spread. Biden's economic
administration, led by former fed officials, has
been criticized for heavy domestic spending, which
may be inflationary. Bidenomics, if I was a
professor, I'd give them an F. The fed needs to stop
helping them out - this is causing inflation. The inflation was primarily
caused by the pandemic and the policy response, but
the policy response under both parties. Most of the fiscal stimulus
occurred when President Trump was president. And
yes, President Biden continued that. Inflation works with a lag,
and so this was something that this was built up all
the way through the pandemic. Reality is that
that short term interest rates are abnormally high
right now to try to combat inflation. Inflation has
been coming down. It'll come down some more. So it makes sense to
normalize. President Biden has promised
to avoid interfering in the tasks of civil servants,
which include the staff at the Fed's board of
governors. His opponent, former President Donald
Trump, reportedly has plans to make interest rate
decisions himself. The Wall Street Journal Now reporting that Donald
Trump's allies are quietly drafting proposals that
would attempt to erode the Federal Reserve's
independence. You would have, you know, an
arrangement with the fed that is not the norm that
we've had in the last 40 years. Former President Trump, when
he was in office, openly criticized the fed for
keeping policy too tight. According to one study, did
have an effect both on markets perceptions of what
the fed would do and actually on the fed. So the study suggests that
the fed actually lowered rates lower than they
otherwise would have been because of the pressure
from the president. It was something the
Federal Reserve buckled that they were they were
concerned about that. The campaigns for both
President Biden and former President Donald Trump did
not respond to CNBC's request for a comment. But in May 2024, the White
House did put out a statement on the importance
of central bank independence. The use of
low interest rates, along with strong spending, has
devastated other societies throughout history. The framers and Ratifiers
were very intentional to set up a system in which
Congress would be the only one, not the president, to
exercise the power of the purse, because, of course,
they had this long and familiar history of
European monarchs abusing the public fisc in the best
case scenario, and the best state of the world, the fed
doesn't do anything differently just because
it's an election year, especially in regard to its
monetary policy function.
