The (A)Political Federal Reserve
Jonathan Song, Dartmouth Business Journal
A frequently asked question on the Federal Reserve’s website is the query of what exactly it means for the Federal Reserve to be an “independent government agency.” According to the official site itself, the “Fed” is structured in a way to remain apolitical so that its monetary policy decisions “do not become subject to political pressures that could lead to undesirable outcomes.” Theoretically, the Fed should not be incorporating partisan politics into its own agenda of raising or lowering interest rates. This idealistic goal is far from the reality.
In fact, the Fed has become increasingly politically-charged, deviating from this goal. In 2016, the United States has experienced a growth in the partisan polarization around the country, which largely results from the upcoming Presidential election. The result of this election has implications not only for social issues and national security, but also for the nation’s economy.
The markets must be ready for either Clinton or Trump to take Obama’s place; that is, the markets must adjust their prices according to how investors believe the new president’s policies will impact domestic and international economic growth. Being ready for the economic future, however, is very difficult to do with two polarizing candidates such as Clinton and Trump. Investors’ outlooks for certain companies will certainly change depending on who America chooses as the next President. Mary Ann Bartels, the head of Merrill Lynch’s Wealth Management Portfolio Strategy explains that if there is “one thing markets hate, it’s uncertainty.” As such, the markets will most likely be incredibly volatile in the weeks leading up to and directly after Election Day, as it is every four years during a presidential election.
Given all these considerations, this presidential election has prevented the Fed from implementing a course of monetary policy independent from politics. Given the Fed’s apolitical nature, the members of the agency try to avoid choosing their policies based on whichever political party wins the Presidency. This attempt at remaining neutral actually creates another political decision that prevents the Fed from ever raising interest rates close to the election.
Every year, the Federal Open Market Committee (FOMC) of the Fed meets during September and November. According to MarketWatch columnist Mark Hulbert, the Fed has raised interest rates during September and November before Presidential elections only once since 1990, which was in September 2004. The 1990s being the years during which the FOMC began to publicly announce their monetary policy target interest rates.
The reason that it is so rare for the FOMC to raise its interest rate target around a Presidential Election is an inherently political one. When the FOMC raises interest rates, markets typically slow down. Higher interest rates make it more expensive for investors to acquire credit from banks, which decreases investment activity. Since the Fed is supposed to be apolitical, it will try to avoid picking political sides when the election rolls around. If it were to hypothetically raise rates if the Democratic nominee wins, its policy would slow the economy, and Democrats may accuse the Fed of playing politics and trying to make the Democrats look bad after the election (vice-versa for the Republicans). As a result of Washington’s politics, the Fed has been under pressure to avoid tightening monetary policy by raising rates.
Outside of the Election, one of the main points of discussion with regards to the Fed revolves around “Audit the Fed” movement. While the Fed already conducts its own audit, proponents for this “Audit the Fed” movement demand that more information be released. Some believe that Congress should have the power to choose the auditor. Norman Singleton, president of the Campaign for Liberty, explains how the Fed’s current audit is only “a financial audit” that “doesn’t really give you a full glimpse of the Fed’s conduct of monetary policy.”
With such distrust of the Fed in Congress, the Fed may be more reluctant to change its monetary policy course. If interest rates rise, Fed officials would undoubtedly come under fire for slowing the markets down and have to justify to political figures their reasons for doing so. While the Fed’s increased accountability certainly has its merits, Jeff Cox explains how “opponents of the ‘Audit the Fed’ movement believe the ultimate consequence will be to remove the Fed’s independence from political pressure.” For better or for worse, if the Fed were increasingly held accountable for its policy course by Congress, political independence becomes unlikely.
In addition, ever since the 2008 market crash, FOMC members have attempted to be more transparent with the public over its monetary policy decisions. These transparency measures include more public speeches by FOMC members, transcripts of these speeches, and increased media coverage of individual members. While this allows the Fed officials to more clearly communicate their rationale behind their policy, it also serves as an outlet for Fed officials to say politically-charged statements and to publicly disagree with the ideology of their colleagues.
For example, the Chairwoman of the Federal Reserve, Janet Yellen, was recently asked a question at her September 21 press conference about income inequality and the middle-class. She responded by emphasizing her prioritization of income growth and of creating better paying jobs “throughout the income distribution.” Critics of Yellen may interpret her answer as being politically liberal. One of the main pillars of the Democratic economic platform is decreasing income inequality, and it seems Yellen aligns with the Democrats on this issue. Some critics may even point at how Yellen was appointed as the Fed Chair by a Democratic President (Obama) as a reason to be wary of her political bias. Supporters of Yellen may emphasize her commitment to a data-dependent approach as proof of her non-partisanship, but there still is a loud clamor on the other side amongst Yellen critics about her supposed political bias.
While it may be questionable whether Yellen was being openly political in her statements, the reality is that increased media exposure of FOMC members allows the media to force officials to answer political questions and contort their words into having a political connotation. Current Minneapolis Fed President Neel Kashkari compared recent media coverage of the Fed to that of shark attacks. What Kashkari means, explains Greg Robb of MarketWatch, is that the media provides “a lot more hype than fact.” Today’s sensationalist media inherently puts the Fed at risk to seem partisan rather than independent.
It seems that this agency, which claims to be self structuring in a way to remain apolitical, is now overwrought with pressures on both sides of the aisle. Recently, Lael Brainard, a Governor of the FOMC, has given donations to Hillary Clinton’s presidential campaign. As explained by Craig Torres of Bloomberg, Brainard gave “$750 in three contributions to Clinton’s campaign between November and January.” Perhaps Brainard’s donations tangibly show how politics has creeped its way into the world of the Fed and monetary policy. Perhaps we are seeing the Fed’s monetary policy start to fuse with the federal government’s fiscal policy. Perhaps we are seeing the complete death of independent bureaucracy as we know it. Or perhaps the Fed may simply need a quick refresher by looking up the FAQ on its official website about political independence.