MNI INTERVIEW: Trump Missed Window For Significant Fed Change

The Trump administration is unlikely to score any major reforms of the Federal Reserve because there is no clear effort to pressure Capitol Hill for the kind of legislative changes that would be needed, former Fed historian Gary Richardson told MNI.

"By Trump spending his time in jawboning the Fed, he probably missed the window to go to Congress, at least the window before the mid-terms," said Richardson, who served as the Fed system's first official historian between 2012 and 2016, in an interview. He added that there are limits to what systemic changes a new Federal Reserve chair, which Trump will get to appoint soon, could obtain. 

The President and his advisers have asserted that they will reshape monetary policymaking and that is unlikely to happen, unless Congress acts.

“Trump doesn't have much time before the mid-term elections, maybe a year. To have Congress change a major piece of legislation takes a lot of debate. That would also come up against a huge amount of lobbying and pressure from businesses and Wall Street that have interests in this," said Richardson. 

CONGRESSIONAL INTENT

Trump has promised to nominate someone who backs lowering the Fed's benchmark overnight interest rate, which he wants slashed as low as 1% from the current 4.25%-4.50% range.

Congressional intent concerning the independence of the Fed matters because it protects the public from the politicization of monetary policy. In 1935, the Senate and House designed the Fed's leadership structure to limit the President's influence on monetary policymaking, which Richardson describes in a recent paper, along with former Fed research director David Wilcox. 

"The Banking Act of 1935 is the foundation for Fed independence, not the Fed-Treasury accord" of 1951, said Richardson. "Congress, the bankers and the businessmen understood this before economists did."

Perhaps the closest parallel to today were the events before the 1951 accord when President Truman wanted long-end Treasury yields pegged at low rates, Richardson said. "The order of magnitude between what people worry about with Arthur Burns or William McChesney Martin and what Trump's been talking about today is really different."

"Trump is saying he wants rates 3 percentage points lower. He really wants to change the cost of government borrowing," he said. "No president has really asked the Fed for this much since Truman." And even then "Truman asked for a lot more because he asked for the Fed, not to peg the short term rate, but to peg the interest rate on long term government bonds and dramatically expand the balance sheet."

"No one's ever asked the Fed for that much since then and I assume the system's response is going to be the same. It's too big an ask," he said, noting inflationary risks. (See: MNI INTERVIEW: FOMC To Go Own Way If Chair Lacks Credibility) 

Current federal law does not support such a request and any presidential demand for FOMC members to resign if they do not agree with the president would be shirking statutory obligations, he said, citing former New York Fed President Allan Sproul. 

"The Congressional Record is very clear that what Truman asked the Fed to do, it should not do, and what Trump is asking the Fed to do, it should not do."

REGIME CHANGE

National Economic Council Director Kevin Hassett, ex-Fed governor Kevin Warsh, and Fed Governor Christopher Waller have emerged as top contenders to be the next chair. Hassett and Warsh have advocated "regime change" at the Fed. (See: MNI POLICY: Regional Fed Banks Could Face Revamp Under Warsh) 

"It may be useful to rethink the Fed and its structure and the leadership, but to do that you have to go to Congress. The Fed and its structure is set in law, and the objectives of the Fed are set in federal law." 

"Can they get things changed by just changing some personnel? Probably not," said Richardson, an economics professor at the University of California, Irvine. "The wholesale change that Warsh and others have advocated, that's only been done by getting Congress to intervene and change the law."