Trouble at the Fed

It is apparently becoming harder and harder to be in Janet Yellen’s shoes, as fierce opposition and criticism are mounting, from without and from within too. Amid the heated rhetoric and tensions brought about by the upcoming US election, the Central Bank has been caught in the crosshairs of the campaigns.

Discontent, Dissent and Dissonance

At least three members (Loretta Mester, Esther George, and Eric Rosengren) of the Federal Open Market Committee, Yellen’s own rate-setting group have voiced their dissent and officially distanced themselves from the Fed’s policies, and its insistence on them. More or less, they practically aligned themselves with Donald Trump, who has accused the Fed chair of creating and inflating “a big, fat, ugly bubble” though artificially low interest rates. Many experts, investors and academics have concurred, while also pointing out the catastrophic effects the policy already had on pension funds, the banking sector and ordinary savers.

Another Trump quote from the debate has also resonated with a large part of electorate, as well as with international observers: “The Fed is more political Secretary Clinton”, he said. Then he went on to cast aspersions over Yellen’s motives: the interest rate policy, Trump claimed, is actually geared towards keeping things calm and relatively stable until the Obama Presidency draws smoothly to its end, rather than helping the economy get back on track. Yellen has insisted, time and time again, that there is no place for politics in the Federal Reserve and that no such considerations are taken into account when deciding on a policy direction. However, such reassuring claims seem to be at odds with the facts.

Credibility Crisis

It emerged, only a few days ago, that Fed Reserve Governor Lael Brainard donated the maximum amount allowed for individual contributions to the Hillary Clinton presidential campaign, placing the Central Bank in an awkward position, to say the least. Kansas City Fed President, Esther George tried to defend Brainard in a subsequent CNBC interview by saying: “The law allows for Fed officials to make those kind of donations. There’s nothing illegal about that.” Yellen herself faced significant pressure and was called to answer sharp questions on the matter, during the last Financial Services Committee hearing. New Jersey Republican Rep. Scott Garrett asked some particularly uncomfortable questions regarding conflict of interest, citing media reports about Ms. Brainard “angling for a top job with the Clinton administration if Hillary wins.” Janet Yellen’s responses left much to be desired. She claimed she has “absolutely no awareness” of those reports and she added that she has never seen politics play a role in Fed officials’ decision-making. Also, in response to another question on the Fed’s relationship with the executive branch, she stressed reassuringly: “I have certainly never been pressured in any way by the administration. The administration, my experience has been, greatly respects the Fed’s independence to make decisions in accord with our congressional mandate.”

Case Closed?

Not so fast, regrettably. This was not the first time that Janet Yellen has found herself in a tough spot, having to answer questions on the Central Bank’s independence, or rather lack thereof, from the political forces of the country. Last year, she was accused, on more than one occasion, of allowing the administration to influence the Fed’s policy decisions. Complaints arose from her meeting schedule: she met more often with officials from the Obama administration than with members of Congress, and also more frequently with Democrats rather than Republicans. Back then, she also denied the accusation of politicising the Fed and maintained that the Bank was completely nonpartisan.

And what of Trump’s claim that Yellen is actively supporting the administration, keeping the rates low so as “not to rock the boat” until the end of Obama’s presidency? Strategically overblown as such an accusation might seem, and certainly lacking evidence to back it up at this point, it is definitely not unheard of for the Fed to “help out” incumbents before elections. During US President Richard Nixon’s 1972 re-election campaign, the then-Fed chair Arthur Burns succumbed to pressure from the administration to pursue expansionary monetary policies, with the goal of reducing unemployment in time for the election. Nixon won with a landslide, but the Fed’s policies were instrumental in triggering the worldwide inflation of the 1970s, with disastrous long-term effects.

It is undeniable that the Fed has a long history of being accused, by both Parties, of political bias and affecting election results, whether intentionally or not. President Jimmy Carter’s defeat in 1980 was blamed by many on Paul Volcker, then-Chairman, and his decision to hike rates in order to battle the 70s inflationary wave. Later, George H.W. Bush said of Greenspan: ““I reappointed him and he disappointed me.”, putting down his own 1992 reelection defeat to the Fed’s refusal to cut interest rates more aggressively during the recession of 1990-91.

Whether there is actual substance to the various accusations, or they too are part of the political blame-game, is really beside the point. The very fact that the Fed Chair and the governors are nominated by the president, guarantees that questions and suspicions will always surround their political inclinations and whether they are allowed to play a role in their decision making. The leadership structure itself is inviting to speculation, and casts a long shadow over its own legitimacy. Or as Caesar put it: “My wife should be as much free from suspicion of a crime as she is from the crime itself.”

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