Fed Thoughts: Lattice Work

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Fed Thoughts July 2018

Vincent Reinhart

Vincent Reinhart - Chief Economist & Macro Strategist

We read the headlines, too. That a public official, especially one raised in the real estate business, does not like increases in interest rates is not shocking. Vigor to spending, support to equity prices, and suppressed borrowing costs all look good to a politician eyeing an upcoming election, despite potential longer-term costs associated with excessive policy stimulus. Because a US election is always coming, monetary policy has been delegated to an independent agency, the Federal Reserve (Fed), to balance near-term benefits and longer-run costs. Independence does not rule out, however, a public discussion about public policy by public officials. It is awkward when that criticism contains more than a touch of self-interest. Post Volcker and Greenspan, the Fed’s ramparts of independence remain high, so the only question is how it influences central bankers’ internal decision-making, not whether decisions will be forced upon them.

The answer is probably not at all. To quote Chair Jay Powell, Fed officials stay in their lane. Macroeconomics, with resource use taut and cost pressures building (albeit slowly), drives the bus, even when some passengers complain about the speed. This is true even when one of those passengers is in the front row.

Besides, this Fed official must recognize that it is seldom wise to rise to the bait President Trump dangles about unorthodox policy initiatives. There is enough chum in the water already, with threats to the global trading system and half-century security arrangements, as well as on-and-off friends as enemies and enemies as friends. That Fed officials remain reluctant to be explicit about the potential effect of trade dislocations on their economic forecast indicates that rhetoric alone is unlikely to spook them. In fact, the more significant risk to central bank independence historically has been behind-the-scenes pressures—when administration officials prey on the loyalties of those they appointed or pose threats about the potential nature of new appointees. Thus far, President Trump has shown little inclination to play the inside-game of influence. In fact, his penchant for public channels often redounds to the benefit of his targets, at least as judged by, say, the approval rating of Canadian Prime Minister Justin Trudeau. Fed officials will hunker down, expect the storm to pass, and work according to plan.

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