FORMER FED PRESIDENT: Here’s how Trump could control the Federal Reserve

As the country tries to parse out its economic future under President-elect Donald Trump, one of the many areas of interest has been the Federal Reserve and monetary policy.

Wall Street analysts wondered whether the election of Donald Trump could lead to the Federal Reserve holding off on interest rate hikes, hiking faster than expected, or even the resignation of Fed Chair Janet Yellen.

One of the most extreme possibilities under a Trump presidency, noted analysts, was the end of the Fed’s political independence.

Trump attacked Yellen and the Fed during his campaign for allegedly helping President Barack Obama and his Democratic rival Hillary Clinton by keeping rates lower than they should be. This suggested to some analysts that Trump himself will try and exert pressure of the central bank when he comes into office.

Writing at Bloomberg View, former Minneapolis Fed President Narayana Kocherlakota laid just how Trump could pack the Fed and exert control over US monetary policy.

First thing, noted Kocherlakota, is that pressure from the executive branch on the Fed has traditionally ended poorly. One instance was right after World War II, when the Fed left interest rates unnaturally low so the government could borrow, sending inflation to 10%.

The second instance occurred under Lyndon Johnson and Richard Nixon (who, as Kocherlakota referenced, was caught on tape pressuring Fed Chair Arthur Burns to leave rates low) which led to low rates and the high inflation of the 1970s.

Given that negative history, Kocherlakota noted that there are two empty seats on the Federal Reserve Board of Governors. Additionally, Fed Chair Yellen’s term expires in 2018, and Vice Chair Stanley Fischer’s does too. Thus, with a Republican Congress that would be unlikely to hold up his nominees, by 2018 Trump could have appointed four out of the seven members of the Federal Reserve’s Board of Governors.

Important to note, the Board of Governors have permanent votes in monetary policy decisions while the regional Fed presidents rotate from voting to non-voting (except for the New York Fed, who always votes). So Trump’s appointees would make up one-third of the voters in monetary policy decisions.

“Now imagine Trump decides that his new appointees should be loyal to him and his pro-growth agenda,” said Kocherlakota. “He could put private (and possibly public) pressure on the Fed chair to ensure that monetary policy supported his administration’s plans, even if doing so led to high inflation. Presumably, he could also appoint a Fed chair sympathetic to his vision.”

As Kocherlakota concludes, this is totally legal and there is little to stop Trump from influencing the Fed other than tradition. Which, as Trump has made clear on the campaign trail, he is not particularly interested in following.

Read the full column at Bloomberg View»

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