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“If the new Federal Reserve Board is of the desired quality and character it will be the most unpopular board that ever sat in Washington.”

— CW Barron (1914)

The Fed’s never-ending struggle with popularity

The Federal Reserve became an election issue last week when both major party candidates weighed in on whether the executive branch should have a say in monetary policy.

As with seemingly everything else, their views could not be more at odds.  

Former President Trump said should he win a second term, he’d expect to have “at least a say” in setting interest rates. To that end, the Wall Street Journal reported that his staff is drawing up proposals to “blunt” the Fed’s independence.

Vice President Harris responded that she “couldn’t disagree more strongly.”

"The Fed is an independent entity, and as president,” she told reporters, “I would never interfere in the decisions that the Fed makes."  

This debate is as old as the Fed itself, although it’s been a one-sided affair for most of its history. 

But decades of precedent could be overturned this November if the winning candidate follows through on their threat to make a radical departure from tradition. 

If Kamala Harris wins the presidency, the historical myth of Fed independence may become fact.

I am once again asking for your support…

Founded with the stated purpose of insulating monetary policy from political influence, the Federal Reserve was expected to “turn deaf ears to all political and sectional considerations,” according to the pioneering financial journalist CW Barron.

Barron optimistically expected that “the greater the clamor for cheap money, the tighter [the Fed] will hold the reserves.” 

As documented by the authors of An Episodic History of Modern Fed Independence, however, it didn’t work out that way.

A series of catastrophes, including two World Wars and the Great Depression, forced the Fed to prioritize the White House's demands — helping the Treasury sell bonds became the Fed’s unplanned raison d’etre.

This subordination is thought to have ended with the start of the “modern” era of the Federal Reserve marked by the Treasury-Fed Accord of 1951. The agreement freed the Fed from the obligation to support US government bond prices and ostensibly restored its independence.

US presidents, however, didn’t seem to get the memo.

In the immediate aftermath of the Treasury-Fed Accord, President Eisenhower pressured Fed Chair William Martin Jr. to “get a greater amount of money supply through the country.” When Martin initially declined, Eisenhower threatened to force him to resign.

Unable to “buck a direct plea from the White House,” Martin Jr. granted Eisenhower’s request for easier money.

The most dramatic confrontation between the White House and the Fed came a few years later when President Johnson summoned the re-appointed Martin Jr. to his Texas ranch and reportedly shoved him against the wall while haranguing him to cut interest rates: “My boys are dying in Vietnam, and you won’t print the money I need!” 

“To my everlasting shame,” Martin Jr. later confessed, “I finally gave in to him.”

The ensuing easy money is considered a primary contributor to “The Great Inflation” that started in 1965.

The White House’s pressure became even more explicit under President Nixon, who joked that he hoped the new Fed Chair Arthur Burns would “independently…conclude that [his] views are the ones that should be followed.”

Far from even pretending to honor Fed independence, Nixon told the Wall Street Journal that he had Chair Burns’s firm commitment to keep monetary policy loose.

In that, at least, the new Fed chair was as good as his word: Burns went so far as to move up the date of an FOMC meeting because Nixon told him he needed rates cut in time so that its effects would be felt in the economy before the 1972 election.

Yikes.

The Fed got a reprieve from White House abuse when President Ford took office, perhaps because Ford viewed inflation rather than unemployment as more of a political threat.

That brief reprieve ended with President Carter, who perhaps uniquely lobbied the Fed for higher interest rates — and when his hand-picked Fed chair, William Miller, refused to raise them fast enough, Carter moved Miller to Treasury so he could appoint the more-hawkish Paul Volcker to lead the Fed.

You might expect that to be the end of the story, as Chair Volcker is the patron saint of Fed independence. 

Alas, it is not.

On the campaign trail, Governor Reagan accused President Carter of making the Fed his “whipping boy.” 

As president, however, Reagan similarly imposed his will on monetary policy — first demanding even higher rates to fight inflation in 1981 and then demanding lower rates to help the economy ahead of midterm elections in 1982.

Saint Volcker complied, according to the authors of An Episodic History of Modern Fed Independence, giving in to demands to cut rates prematurely.

But by 1987, President Reagan had decided that Volcker had not complied enough, and so replaced him with Alan Greenspan. 

Two years later, the Chicago Sun-Times reported that Greenspan had loosened monetary policy “under backstage pressure from the administration.”

Greenspan’s three successors (Bernanke, Yellen and Powell) have since restored a measure of the Fed’s self-respect — but perhaps not as fully as popularly thought. 

A study of the Trump administration found that the former president’s effort to impact monetary policy by tweeting mean things at the Fed seems to have worked: “The average effect [of Trump’s tweets] on the expected fed funds rate is negative and statistically significant.” 

Expected fed funds is not the same as actual fed funds, of course, so it’s hard to say exactly how much influence Trump had on monetary policy while in office. 

However much he had, though, he’d like to have more the next time around. 

History suggests he’s likely to get it.

— Byron Gilliam

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