The Fed's Latest Claim of "Independence" Is As Unconvincing as Ever
Here we go again. A fed official is once again going to the media to repeat the age-old myth that the Fed is totally independent of political influence.
The last time we heard about this from someone at Powell's level what last year, when Steve Mnuchin reminded everyone of the Fed's alleged independence in January:
Responding in writing to questions from Senator Bill Nelson , Steve Mnuchin described the Fed as “organized with sufficient independence to conduct monetary policy and open market operations.” He also praised “the increased transparency we have seen from the Federal Reserve Board over recent years.”
This time, it's Fed chair Jerome Powell himself, who granted an interview to NPR's Marketplace . Most of the interview was devoted to making this point about independence. Here's some of it:
Ryssdal: There is a question that has to be asked — actually a couple of them — about the political environment in which this economy operates right now. Granting that the Fed has always been a source of political frustration for many in the executive branch, it's worth pointing out here that Larry Kudlow, the chairman of the president's National Economic Council, and the president himself have said they are low-interest rate guys. Larry Kudlow encourages the Fed to move very slowly on interest rates on the theory that rising interest rates would be a tricky thing for the president politically. Do you think it's appropriate for the White House to be not telling the Fed what to do, but saying these things in public?
Powell: Let me just say I'm not concerned about it, and I'll tell you why. We have a long tradition here of conducting policy in a particular way, and that way is independent of all political concerns. We do our work in a strictly nonpolitical way, based on detailed analysis, which we put on the record transparently, and we don't consider political considerat — we don’t take political considerations into account.
I would add though that no one in the administration has said anything to me that really gives me concern on this front. But this is deep in our DNA. For a long, long time the Fed has felt it important to conduct our business that way. I'm deeply committed to that approach. And so are all of my colleagues here.
Ryssdal: Which I understand, but you're also humans. And when the White House leans on you, you must feel it.
Powell: Again, nothing has been said to me publicly or privately that gives me any concern about our independence.
Ryssdal makes a point that anyone not trained to believe Washington, DC sound bytes would see. Powell, like everyone else involved in the Fed's governance is a human being and brings with him his own biases.
We saw some of this in 2016 when it came to light that Fed employers donated far more money to the Hillary Clinton campaign, than to any other campaign:
Bloomberg had an interesting report this week looking at the political contributions of Federal Reserve employees this election season. Unsurprisingly, Hillary Clinton is dominating the field, receiving $18,747 in contributions — over four times more than all other candidates combined. While most of the donations came from lower level Fed officials, Federal Reserve Governor Lael Brainard came under fire for making several donations to Clinton’s campaign.
When people like Powell say "non-political," though, they don't mean non-ideological or unbiased. They mean they aren't making decisions in a way so as to benefit certain candidates or certain political parties.
Even if this were true — which it's not (see below) — it would be of little comfort. The Fed can still act to benefit certain groups over others. Its policies can be employed to keep interest rates low for governments, so as to keep the cost of the national debt low. The Fed can adopt policies that benefit Wall Street more than Main Street. The Fed can act to benefit spenders rather than savers.
These acts of picking winners and losers, and influencing public policy, would be considered "political" by a normal person — as indeed they are political. They're just not directly connected to any political campaign.
Besides, the fact the Fed behaves as a political institution has been documented for years by political scientists. ( Whole classes are taught on the subject .) Only economists and media talking heads are so naive or so willfully ignorant as to believe a policymaking institution can be "non-political."
But even on the matter of straight-up efforts to influence elections, the Fed is guilty. In 2010, when Fed Chairman Arthur Burns's diary was published, Doug French noted:
Burns's diary is page after page of political dirty dealing, lying, and backstabbing. Nixon went so far as to plant negative press about Burns and threatened to expand the Fed's Board of Governors to dilute the chairman's influence, all to bring Burns in line with the president's economic meddling. None of that seems necessary; Burns's diary would indicate that the president had him at hello.
No doubt a well-worn path still exists between the Eccles Building and the White House. But the myth continues. Economist Mark Zandi told CNBC's Lori Ann LaRocco recently,
I think the worst thing that could happen is if the Fed was politicized. An a-political Federal Reserve is a cornerstone of our financial system and broader economy. So nothing is more important than maintaining the Fed's independence. And the fact that its wrapped in the political process is just disturbing and disconcerting.
Ultimately, though, we need to ask ourselves if "independence" is even something that is desirable. After all, the flipside of "independence" is a lack of accountability. The only way for the Fed to be truly independent would be if it was totally unaccountable. Murray Rothbard wondered if that would be a good thing:
“Independent of politics” has a nice, neat ring to it, and has been a staple of proposals for bureaucratic intervention and power ever since the Progressive Era...But it is one thing to say that private, or market, activities should be free of government control, and “independent of politics” in that sense. But these are government agencies and operations we are talking about, and to say that government should be “independent of politics” conveys very different implications. For government, unlike private industry on the market, is not accountable either to stockholders or consumers. Government can only be accountable to the public and to its representatives in the legislature; and if government becomes “independent of politics” it can only mean that that sphere of government becomes an absolute self-perpetuating oligarchy, accountable to no one and never subject to the public’s ability to change its personnel or to “throw the rascals out.”