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Jay Powell Is His Own Man

Irwin M. Stelzer

They came, they dined, they wined (some whined at the strong dollar), they talked, they posed for photo ops, many in casual clothes unused since last year, they left. This weekend, central bankers from around the world descended on Jackson Hole, Wyoming to attend the 39 th Economic Policy Symposium sponsored by the Kansas City Federal Reserve Bank. There was the usual exchange of views on such technical matters as the level of the neutral rate of interest, the rate that neither encourages nor discourages economic activity.

But there was a new item on the agenda—what is the new man at the Fed like, and will he capitulate to the pressure the president of the United States is putting on him. After all, the Fed’s decisions on monetary policy affect not only the United States. As Richard Nixon’s Treasury secretary John Connally put it, the dollar “is our currency, but your problem.” A strong dollar resulting from high interest rates, for example, attracts investment funds out of developing countries and forces their central bankers to raise interest rates in response, even if their economies are struggling.

For Federal Reserve Board chairman Jay Powell, this was his first rodeo, to use the vernacular of the West. Trump has made it clear that he wants the man he appointed to stop all this nonsense about raising interest rates. The president is gambling that rapid economic growth will offset his low personal popularity ratings and help Republicans retain control of the House and Senate come the November 6 elections. So, and true to his days as a real estate developer, Trump prefers low interest rates that speed up growth rates, at least in the short run. And with the congressional elections only 72 days away, it is the short run that concerns Trump.

In his typically subtle way he let his views be known. “I’m not thrilled with his raising rates. No, I’m not thrilled . . . because every time we go up, they want to raise rates again. But at the same time, I’m letting them do what they feel is best.” As if he had any other choice.

And Trump told Republican donors at a fundraiser that he had expected Powell to be “a cheap money chairman.” Presumably, he divined that when he interviewed Powell during his search for a replacement for Janet Yellen, who must have seemed to Trump too determined to continue raising rates.

Whether the president was violating precedent by “interfering” with the Fed’s “independence” is unclear. Some say that the Fed has historically been immune to presidential interference. Others, most notably the late professor Allan Meltzer, author of a two-volume history of the Fed, say assertions of independence by the chairman have alternated with cooperation with the White House incumbent. President Reagan did give political cover and support to chairman Paul Volcker’s decision to raise interest rates to 20 percent, and the unemployment rate to 10.8 percent, to squeeze President Jimmy Carter’s inflation out of the system, but that policy decision was Volcker’s. In other cases, Fed actions arguably represented adjustments of policy to suit the sitting president.

For 30 years economists have held the Fed chair. Alan Greenspan, who served more than 18 years, took pride in using the language with such precision that it ceased to be a means of communication. “If I seem unduly clear to you, you must have misunderstood what I said,” he famously quipped. Then came 12 years of academics Ben Bernanke and Janet Yellen.

Powell is a man of the street, albeit Wall Street, who prides himself on clarity of expression. He ignored Trump’s pressure in a speech that might well have been titled, “The president has his job, and I have mine,” and indicated that he plans to go forward with a further rate increase in September, and another in December unless the economy dramatically slows. The markets assign a 60 percent probability to a December increase. Powell also says he will do whatever it takes to prevent inflation from under- or over-shooting the Fed’s 2 percent inflation target, but suggested that he would look to excesses in financial markets, with which he has a close familiarity, as well as the inflation rate when shaping policy. He also declared that the federal deficit, due to pass $1 trillion in the coming fiscal year, is on an unsustainable path, a remark that the thin-skinned Trump might reasonably take as a swipe at his tax cuts.

Powell is not the first chairman to demonstrate that the elected leader of the free world is powerless to bend a mere bureaucrat to his will. President George Herbert Walker Bush wanted the Greenspan Fed to lower interest rates to assure his re-election. It refused. Goodbye Bush, hello President Bill Clinton. “I think that if interest rates had been lowered more dramatically that I would have been re-elected president,” Bush said after the fact. “I reappointed him and he disappointed me.” As Powell has Trump.

Powell’s re-assertion of Fed independence is good news for America, and by extension the global economy. Countries that have politicized central banks eventually pay a high price. Turkey’s economy is a mess because President Erdogan insisted that the central bank keep interest rates unduly low to put his economy on a sugar high, appointing his son-in-law Berat Albayrak, to control monetary and economic policy, all resulting in a plunge of the lira. Venezuela’s dictator/president, Nicolas Maduro, forced the central bank to print money, resulting in inflation running at an annual rate of 1 million percent, and food shortages so severe that the average weight of Venezuelans declined by 25 per cent last year.

And the problems of these nations don’t stay at home. Turkey’s woes affect its ability to discharge its responsibilities as a member of NATO and act as a stabilizing force in the Middle East, and Venezuela’s have caused over 1.5 million of its citizens to flee, burdening their country’s neighbors and creating the possibility of a Syria-style failed state in America’s backyard.

The Fed’s forecasting and policy record is far from perfect. But Powell’s insistence on the Fed’s right to make its own mistakes rather than those pushed by Trump is a good thing, and not only for America.

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