Power & Market

The Fed is Inherently Political

Many are questioning the Federal Reserve’s political independence lately. A reporter asked about it at the end of Chair Powell’s FOMC press conference, and it also came up in Powell’s 60 Minutes interview:

PELLEY: Your decisions inevitably are going to have a bearing on this year's election. And I wonder, to what degree does politics determine your timing?

POWELL: We do not consider politics in our decisions. We never do. And we never will. And I think the record—fortunately, the historical record really backs that up. People have gone back and looked. This is my fourth presidential election in the Fed, and it just doesn't come into our thinking, and I'll tell you why.

Two reasons. One, we are a non-political organization that serves all Americans. It would be wrong for us to start taking politics into account. Secondly, though, it's not easy to get the economics of this right in the first place. These are complicated, you know, risk-balancing decisions.

If we tried to incorporate a whole 'nother set of factors in politics into those decisions, it could only lead to worse economic outcomes. So, we simply don't do that, and we're not going to do it. We haven't done it in the past, and we're not going to do it now.

PELLEY: There are people watching this interview who are skeptical about that.

POWELL: You know, I would just say this. Integrity is priceless. And at the end, that's all you have. And we in, we plan on keeping ours.

“Integrity is priceless,” he says. This is pure public relations-talk.

The central bank is inherently political. As a creature of Congress and, effectively, an arm of the US Treasury, everything it does has bearings on elections, government spending and debt, consumer sentiment (and therefore incumbent approval ratings), and the wealth of the big political donor class.

There is a revolving door for the leadership positions at the Fed, the Treasury, and the financial institutions it is supposed to regulate. Also consider the conflicts of interest in a system where Fed officials are appointed by politicians whose agendas are served by Fed policies.

The assertion that the Fed's actions are guided solely by its dual mandate ignores the fact that the Fed creates the problems it is supposed to resolve. Artificial credit expansion fuels bubbles, and when the bubbles burst, the Fed takes on new powers and reinflates. It’s a self-feeding cycle that is best interpreted as not just self-preservation, but self-aggrandizement with a heaping dose of moral hazard.

The Fed’s monopoly in creating money grants it the ability to siphon resources away from the private economy for the benefit of the government and favored financial institutions. It’s a friend to all politicians who want more spending and debt. And through emergency bailouts, being the lender of a last resort, and offering generous lending facilities like the Bank Term Funding Program, the Fed protects its privileged financial institution friends from the natural market consequences of their own mistakes.

And its actions are not subject to any legal scrutiny, as the Fed’s Doomsday Book put in high relief. The Fed whips out brand new “policy tools” during crises—tools that even Fed officials said the Fed has dubious-at-best authority to wield. They just act and nobody asks questions later. The Fed is a political monster with no checks and balances.

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