MNI INTERVIEW: Fed Winning Fight Over Independence-Richardson

The Federal Reserve has so far retained operational independence despite the Trump White House's sharp break with the norm of staying publicly mum on monetary policy, and incoming chair Kevin Warsh will likely pursue reforms that represent more evolution than revolution, Gary Richardson, the Fed system's former first official historian, told MNI.

"Trump used a lot of novel approaches to try to role back the independence of the Federal Reserve and to get control of the levers of monetary policy. So far, he's had much less success than most other presidents. Unprecedented attacks and really less action," said Richardson, who served as the first official historian of the Federal Reserve System from 2012 to 2016. 

Richardson characterized the U.S. president's approach as "a lot of smoke and not much fire. Other presidents have had more influence over monetary policy by talking to Fed leaders in a sensible way and by explaining what policies they were going to run," said Richardson, now a professor at the University of California, Irvine.

He agreed with Fed Governor Chris Waller's recent assessment that central bank operational independence remains in place, even if traditions are being broken.

"Trump and the administration have attacked the independence of monetary policy decisions in a way which is unusual for the last couple of decades," Rchardson said, noting the use of social media and Truth Social. "Long ago, the designers of the system put in a lot of institutions to protect the independence of the Fed. It's a multi-layered defense, with norms and unwritten traditions of mutual restraint as one defense."

POLICY REGIME 

After eight years, Wednesday will be the last time that Jerome Powell steps up to the podium as Fed Chair. It’s also the day that Kevin Warsh will be voted out of the Senate Banking Committee to the full Senate. Warsh will likely will be in place as Fed Chair at the Fed’s June meeting.

Warsh’s calls for policy regime change, if successful could roll back years of changes in monetary policy at the Fed. Warsh has clarified that his calls for “regime change” do not involve firing Fed Bank presidents over policy differences. (See MNI POLICY: Warsh Could Reshape Fed On Rates, Communication)

Richardson said changes at the Fed have been a continuous process and he expects Warsh to pursue reforms over time as he engages with Congressional leaders, just as other incoming Fed chairs have done. 

While he does not expect massive shifts under Warsh compared to those under Paul Volcker, Alan Greenspan or Ben Bernanke, he noted some changes could include factors that have not yet been flagged for the public -- like a possible tweak in the target for inflation.

"You could adjust a little bit our understanding of the way the law works, but that's still within the structure set up by Congress," said Richardson. (See: MNI INTERVIEW: Warsh Signals Caution On Balance Sheet Plans) 

"The law doesn't say the Fed has to target a 2% rate of inflation. This is an understanding between the leaders of the Federal Reserve, the Senate and the House. That can change. Maybe they say 3% is ok. Maybe they say a range is ok."

INSTITUTIONS

Reviews of the central bank's tools and procedures are not uncommon, Richardson said. "The Fed has had a whole bunch of monetary policy reviews. This is a constant, ongoing discussion," he said. 

"It doesn't seem like he's signaled that he's going to do anything dramatically differently than it's been done and they are certainly not trying to change any of the underlying institutions," he said, calling discussions about a new Fed-Treasury Accord "largely talk" where major changes would need to be through legislative means. 

One of Richardson's papers, co-authored by former Fed staffer David Wilcox, was cited numerous times in the legal proceedings and the Supreme Court hearing in Lisa Cook's attempted firing.