MNI INTERVIEW: Politics Already Influencing Path Of Fed Policy

Political pressures helped underpin the Federal Reserve's decision to lower interest rates and the specter of further intervention from the White House will keep the central bank on an easing path for the foreseeable future, former New York Fed and Kansas City Fed economist Rick Roberts told MNI. 

Roberts said sharp downward revisions to employment drove policymakers to flag downside risks to the job market in their decision to lower the fed funds rate for the first time this year to a 4-4.25% range. 

But the relentless push from President Donald Trump for lower rates, including the appointment of CEA Chair Stephen Miran to the board and the unprecedented attempted to fire Governor Lisa Cook,is also clearly being felt, he added in an email exchange 

"Trump's vocal criticisms, the Miran appointment, and the Lisa Cook situation seem to have influenced the Fed's internal dynamics. My view is that the committee now operates in an environment where economic data and political considerations will combine to shape future policy decisions, at least over the short run," he said. "Easing will be the path of least resistance moving forward, even in the face of what previously would have been considered neutral data."

JOB MARKET

The Fed and Chair Jerome Powell cited threats of further labor market deterioration as the macro driver for the decision to ease and pencil in two additional cuts for 2025 on median. 

"Clearly the magnitude of the benchmark revisions and to a lesser extent the early-September spike in unemployment claims got the committee's attention to size up the downside risks to the labor market," said Roberts, now a professor at Monmouth University. (See MNI POLICY: Job Revisions Pressure Fed To Cut In September)

Roberts believes that whether or not the threat to Fed independence further materializes hinges in part on the success of the easing campaign on which the central bank has just embarked -- still a risky proposition with inflation well above the 2% target.

"If the suspected easing helps the economy, the political influence may cement itself," he said. "If it backfires -- by reigniting inflation or destabilizing markets (including frothy asset markets) -- calls may grow for measures to limit executive branch influence. Excessive Congressional intervention on that front could ironically constrain the Fed, trading one form of political pressure for another."

The Fed's September dot plot showed a deeply divided committee ranging from one official not wanting to cut at all to another member, most likely Miran, penciling in 150 basis points of cuts for this year.