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How not to push back against Trump

Summary:
Former New York Fed president Bill Dudley penned an explosive and shocking Bloomberg op-ed today: U.S. President Donald Trump’s trade war with China keeps undermining the confidence of businesses and consumers, worsening the economic outlook. This manufactured disaster-in-the-making presents the Federal Reserve with a dilemma: Should it mitigate the damage by providing offsetting stimulus, or refuse to play along? If the ultimate goal is a healthy economy, the Fed should seriously consider the latter approach. Dudley ended the op-ed by abandoning the normal apolitical stance of a (former) Fed official and picking sides [emphasis added]: I understand and support Fed officials’ desire to remain apolitical. But Trump’s ongoing attacks on Powell and on the institution have made that

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Former New York Fed president Bill Dudley penned an explosive and shocking Bloomberg op-ed today:

U.S. President Donald Trump’s trade war with China keeps undermining the confidence of businesses and consumers, worsening the economic outlook. This manufactured disaster-in-the-making presents the Federal Reserve with a dilemma: Should it mitigate the damage by providing offsetting stimulus, or refuse to play along?

If the ultimate goal is a healthy economy, the Fed should seriously consider the latter approach.

Dudley ended the op-ed by abandoning the normal apolitical stance of a (former) Fed official and picking sides [emphasis added]:

I understand and support Fed officials’ desire to remain apolitical. But Trump’s ongoing attacks on Powell and on the institution have made that untenable. Central bank officials face a choice: enable the Trump administration to continue down a disastrous path of trade war escalation, or send a clear signal that if the administration does so, the president, not the Fed, will bear the risks — including the risk of losing the next election.

There’s even an argument that the election itself falls within the Fed’s purview. After all, Trump’s reelection arguably presents a threat to the U.S. and global economy, to the Fed’s independence and its ability to achieve its employment and inflation objectives. If the goal of monetary policy is to achieve the best long-term economic outcome, then Fed officials should consider how their decisions will affect the political outcome in 2020.

Wow! What were they drinking at Jackson Hole? Maybe Dudley is angling for a job at the Bundesbank.
 

We’ve down this road before

A cacophony of critical responses followed. The article puts the Fed`s precious independence at stake, and risks politicizing the venerable institution forever. It also enables Trump supporters to hold up as an example of the Deep State conspiracy against Trump. A Fed spokesman put out a statement disavowing Dudley’s views:

The Federal Reserve’s policy decisions are guided solely by its congressional mandate to maintain price stability and maximum employment. Political considerations play absolutely no role.

Yet, we’ve been down this road before. Sam Bell highlighted criticism by Kevin Warsh.
 

How not to push back against Trump

Matt Yglesias also pointed out that Alan Greenspan played a passive-aggressive game of opposing the Clinton administration during 1993-94.
 

How not to push back against Trump

While I sympathize with the trap the Fed finds itself caught in, Dudley’s frontal attack on Trump is wrongheaded, and creates more problems that it solves.

While I am not endorsing the following course of action, there are better ways of affecting policy than Dudley’s impetuous charge on the White House. If the Powell Fed were to push back against Trump’s policies, it should take a page out of Greenspan’s playbook by making the following points, either during Congressional testimony, or speeches by Fed officials:

  • The US economy is in a good place, and growing well; but
  • Business confidence is suffering because of trade policy, and trade tensions are creating a high level of global uncertainty;
  • By mandate, the Fed stands ready to cushion any slowdown; but
  • Monetary policy is not the only tool available, and Congress could act more effectively to promote growth by mitigating trade policy uncertainty.

Since the Fed answers to Congress, sometimes a little subtlety, and building alliances, works better than a frontal assault.
 

About Cam Hui
Cam Hui
Cam Hui has been professionally involved in the financial markets since 1985 in a variety of roles, both as an equity portfolio manager and as a sell-side analyst. He graduated with a degree in Computer Science from the University of British Columbia in 1980 and obtained his CFA Charter in 1989. He is left & right brained modeler of quantitative investment systems. Blogs at Humble Student of the Markets.

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