The clash between President Donald Trump and the Federal Reserve escalated Tuesday when a former top Fed official suggested the central bank should work against Trump’s reelection.
The comment by Bill Dudley, who was president of the powerful New York Fed branch until last year, prompted the Fed to jump into damage control mode, denying that the central bank would play any role in election-year politics.
In an op-ed for Bloomberg published Tuesday, Dudley said the central bank should not try to offset the economic damage from Trump’s trade wars by cutting interest rates, saying that would allow voters to appreciate the negative effects of the president’s policies.
It was a direct rebuke of Trump, who has relentlessly pressed the central bank in recent months to slash interest rates to boost the economy and depress the value of the dollar, which would make U.S. exports cheaper.
The Fed cut rates in July for the first time in a decade, citing the adverse effects of trade conflicts as a major reason, and could do so again next month.
“I understand and support Fed officials’ desire to remain apolitical,” wrote Dudley, who was vice chairman of the central bank’s rate-setting committee until mid-2018. “But Trump’s ongoing attacks on [Fed Chairman Jerome] Powell and on the institution have made that untenable.”
“Central bank officials face a choice: enable the Trump administration to continue down a disastrous path of trade war escalation, or send a clear signal that if the administration does so, the president, not the Fed, will bear the risks — including the risk of losing the next election,” he added.
In the final paragraph of the piece, he went further, saying it was arguable that Trump’s reelection “presents a threat to the U.S. and global economy, to the Fed’s independence and its ability to achieve its employment and inflation objectives.”
“If the goal of monetary policy is to achieve the best long-term economic outcome, then Fed officials should consider how their decisions will affect the political outcome in 2020,” he said.
The Fed quickly disowned Dudley's comments.
“The Federal Reserve’s policy decisions are guided solely by its congressional mandate to maintain price stability and maximum employment,” said Fed spokesperson Michelle Smith in a statement. “Political considerations play absolutely no role.”
More broadly, Dudley's piece runs counter to messaging from the Fed. Powell has spent over a year doggedly insisting that the central bank is not influenced by political interference and avoiding any statements that could heighten tensions with the president.
He has, however, said he would not step down if Trump asked him to.
Trump tweeted his latest jab at the Fed on Tuesday afternoon, with no mention of Dudley: "The Federal Reserve loves watching our manufacturers struggle with their exports to the benefit of other parts of the world. Has anyone looked at what almost all other countries are doing to take advantage of the good old USA? Our Fed has been calling it wrong for too long!"
Dudley's op-ed generated a swift and largely negative reaction in economic circles, with many prominent commentators calling the final paragraph misguided or even dangerous to the Fed as an institution. The central bank is granted policy independence so it can act in the long-term interest of the economy, rather than to serve partisan interests.
Peter Conti-Brown, a professor at the University of Pennsylvania's Wharton School who specializes in Fed history, noted that Fed watchers have long debated whether the central bank should be used as an insurance policy against bad economic policy decisions.
But “in today’s climate, an op-ed from the former vice chairman of the [Federal Open Market Committee] arguing that the Fed should be transparently reactive to Donald Trump is a little bit dangerous,” he said. “Where Dudley completely jumps the shark is by saying we should have a republic with central bankers who pick winners and losers.”
“He’s either saying, follow my advice on not providing stimulus and the natural consequence will be voters boot this guy out and that will be a good result,” he said. “Or he’s saying, be more aggressive in making sure that voters correlate adverse economic consequences with the Trump administration.”
He called the latter a “hijacking of the American electorate.”
Conti-Brown said the most likely result of the Fed following Dudley’s advice would be that Congress would move to remove the central bank’s political insulation and make it a bureau of the Treasury Department.
“If Powell follows Dudley’s advice … then we’ll mark that as the end of independent central banking,” he said.
Article originally published on POLITICO Magazine