![Donald Trump this week said that Federal Reserve Board Chairman Janet Yellen won't raise rates because President Obama told her not to. Why he's (sort of) right. [Credit: CNBC]](https://i0.wp.com/www.dougsbriefcase.com/blog/wp-content/uploads/2015/11/credit-cnbc.jpg)
Donald Trump this week said that Federal Reserve Board Chairman Janet Yellen won’t raise rates because President Obama told her not to. Why he’s (sort of) right. [Credit: CNBC]
Corporate news-gathering outlets do their best to repeat and amplify his every offbeat utterance. His accusation that Marco Rubio is a “disaster with his credit cards” has rippled through the press and forced Rubio to respond. Ditto for Trump’s mockery of Jeb’s energy, Carson’s religion, Carly’s face, Kasich’s poll numbers, Hillary’s marital relations (“If Hillary Clinton can’t satisfy her husband what makes her think she can satisfy America?”), Bernie’s mental health and the menstrual cycles of debate moderators.
But as they were buzzing about his scheduled appearance on Saturday Night Live, the media largely overlooked what was perhaps Trump’s most heretical accusation of all.
“In my opinion [Federal Reserve Chairman] Janet Yellen is highly political,” Trump said during a press conference to promote his new book, “and she’s not raising rates for a very specific reason: because Obama told her not to.”
Leave aside for the moment that there is absolutely no evidence that the President has “told” Yellen not to raise rates. Indeed, she suggested at a Congressional hearing this week that the Fed might raise them next month, something that seems more possible in light of the October jobs report. Facts rarely constrain The Donald.
Trump’s heterodoxy is his assertion that Yellen is “highly political,” a statement that tears at the core mythology of the Fed as a post-modern priesthood that dispassionately examines the entrails of economic data, entirely unsullied by politics.
The Federal Open Market Committee sets monetary policy in pursuit of its mission “to help promote national economic goals.” Its ten members comprise academics and bankers, including two former executives from Citigroup and one each from the Carlyle Group and Goldman Sachs. Four of them previously held political positions in the executive branch. All of them are political appointees.
Their upcoming actions — or inactions — are especially momentous now, coming as they do after nearly seven years of holding interest rates near zero and loading their balance sheet with $2.5 trillion in Treasury debt (making the Fed the Treasury Department’s second largest creditor, after Social Security) and $1.7 trillion in mortgage-backed securities. The Federal Reserve has never before implemented such policies, so there is no historical experience to inform predictions of what will happen when the Fed begins to unwind them..
The Fed’s Chairman doesn’t hesitate to claim that its actions helped “stabilize the financial system during the crisis” of 2008 and that they have since “supported the economic recovery,” though that recovery has been anemic and spasmodic. The Fed’s policies, she argues, have made a difference.
If implementation of these policies has been so powerful an elixir, their reversal presumably also will have profound effects that will ricochet through the global economy. Yellen’s year-long flirtation with raising interest rates already has affected global markets, engendering speculative trades that have helped strengthen the dollar, drive down commodity prices and roil developing economies.
There is no telling what will happen when the Fed actually begins to raise rates. Yellen knows that risk and uncertainty attend such a change in policy. And she is acutely aware of the potential political implications.
If the stock market went sideways in an election year or the economy soured, Democratic candidates would likely suffer at the polls. Yellen doesn’t want that to happen, and certainly doesn’t want to be remembered for helping put a Republican in the White House. That concern — and not mind-numbing volumes of economic indicators alone — affects her decisions.
The Fed’s apologists would have us believe that Yellen and her colleagues are not influenced by their political allegiances. They believe that politics won’t affect the Fed’s decisions because its members are quarantined from the influence of voters.
This naivete is a characteristic of the governing class’s paradoxical views about democracy. On the one hand, it champions universal suffrage and democratic institutions, while on the other conferring enormous power on people whose jobs don’t require winning anyone’s vote. Having insulated certain government entities from the electorate, they assume that they have also inoculated them against political motivations.
This elitist impulse is most clearly evident in the executive branch. The notion is that vesting power in 2.7 million civil servants, whose tenure is unaffected by Presidents, elections and job performance, has produced high-minded government uncontaminated by politics. Anyone who has worked in a government bureaucracy knows that many of the most highly motivated civil servants have political agendas, which they routinely impose within the spheres of their power.
The Supreme Court is a second example. The Founders envisioned the judiciary as “the least dangerous branch,” since it could neither make laws nor enforce them. Instead it has become a vehicle for imposing the political and cultural sensibilities of a cloistered and homogenous elite on American society, contravening acts of Congress, plebiscites, state constitutions and legislatures in the process.
The Fed’s presumed apolitical nature is a third example. Its governors studied in the same universities and spent the bulk of their careers either teaching at those schools or seeking their fortunes in the industry they now regulate. Their insularity is considered a virtue, allowing them to implement economic theories they internalized at university, far removed from the real-life experiences of the hundreds of millions of people whose lives their decisions affect.
The Fed and its acolytes believe in their bones that economic power should be entrusted to people like them, whose academic credentials, temperament and expertise require that they be kept at a safe distance from democracy’s taint.
That may be true. Maybe we’re better off conferring responsibility for many of the most important economic, social and cultural decisions to people we don’t elect. But we shouldn’t imagine that shielding our judges, bureaucrats and Federal Reserve Board members from the political process removes politics from their decision-making.
Trump’s allegation that the President told Yellen not to raise rates is pure fabrication. His contention that political calculations figure into the Fed’s decisions is exactly right.