Coming Soon: Trump vs. Yellen
The big question about President-elect Donald Trump is what happens when things start to go wrong. There's no doubt they will. Every president has to contend with unforeseen setbacks, and for Trump it will be worse. His outlandish and often contradictory promises guarantee he'll have plenty of bad news to explain away or blame on other people.
The economy will be high on the list -- and Trump already has a scapegoat-in-waiting. In one of the presidential debates, he attacked Federal Reserve Chair Janet Yellen for keeping interest rates low for political reasons, and said this would cause big problems once the Fed had to start pushing rates higher.
The fact is, this economy is not the kind a new president would choose to inherit. It's better to take over in a trough than at what might prove to be a peak. The stock market is testing the upper bounds of plausible valuation, the economy is at or close to full employment, a strong dollar is making life harder for exporters, and the Fed just resumed its effort to get interest rates back to a more neutral level. In short the stage is set for bad news, with Yellen in a starring role.
Soon, the issue will be whether Trump confines himself to squawking about monetary policy or tries to use the power of his office to fix what he says is the problem.
Yellen's term runs until February 2018, and Fed chiefs can't be removed except for cause. Still, one can imagine Trump responding to disobliging economic news by calling on her to resign. She shouldn't, but this would put her in a difficult position. One can even imagine him saying there's reason to fire her. Keeping interest rates low for political reasons, as he put it, would seem to qualify as cause. The charge is both unfair and absurd, but why would that stop Trump from making it?
It's actually typical of the president-elect that he accused Yellen not of getting policy wrong -- reasonable people can disagree about that -- but of acting in bad faith. And it would be equally Trump-like to then contradict himself by arguing that monetary policy is political by its very nature, and that the Fed should therefore be brought under (his) political control.
In short, these will be testing times for the idea of an independent Fed. It doesn't help that the case in principle for central-bank independence is far from self-evident. Monetary policy isn't narrowly technical, so handing it over to technocrats is questionable. In discharging the price-stability part of its mandate, the Fed makes choices about how much unemployment to tolerate and for how long. Its interest-rate decisions -- not to mention once-heterodox policies such as quantitative easing -- have big distributional consequences.
In addition, after the crash, most central banks, not just the Fed, were granted or gathered to themselves new regulatory powers. The concept of macroprudential policy has gained ground. That's a hybrid of monetary and regulatory policy -- encompassing, for instance, the idea that permitted loan-to-value ratios for some kinds of lending to be varied according to the state of the business cycle. The wider the remit of central banks, the harder defending the principle of their independence becomes.
Yet the practical common-sense case for independence is stronger than ever. It boils down to this: Yes, the Fed is being asked to do too much -- but no other branch of government is about to step forward if the central bank recuses itself.
Earlier this month a panel of scholars presented a volume of essays on the issue at the Hoover Institution in Washington. The book, "Central Bank Governance And Oversight Reform," is an excellent source for up-to-date thinking on the subject.
During the presentation, one of the authors, Kevin Warsh, responded to a questioner who asked, in effect, the crucial question: What use is it to tell the Fed to step back to a narrower role when Congress is unable and unwilling to step forward? Warsh answered by asking the audience to imagine the salutary effect on Congress if Yellen were just once to say: That isn't the Fed's job -- you'll have to take care of it.
Call me skeptical. You'd need a little more than that to budge Congress from its default mode of long-winded paralysis. As for Trump, I could easily imagine him firing back, "Fine. If you can't fix the problem, we'll name a Fed chair who can."
Central banks didn't get everything right before and after the crash, but things would have gone much worse if they hadn't acted so forcefully. Ben Bernanke and Janet Yellen deserve praise and thanks, not censure. To repeat, the case in principle for central-bank independence may be weak, but the practical case has never looked better. Today, you can sum it up in just two words: President Trump.
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