I was on the set Fox Business set this afternoon talking with Charles Payne and Quincy Krosby about Fed policy. Payne suggested that both the political left and right are trying to politicize the Federal Reserve to print money for their favorite programs.
I suggest the Fed’s independence will not so easily be encroached upon. There is not a groundswell of support for a 50 bp cut. It seems that there are two primary calls. One is from the new nominee to the Federal Reserve Board of Governors, and the other is from President Trump’s economic adviser.
Some observers, including Quincy in this clip, argues that the Fed’s decision to hike rates in December was a mistake and it by doing so it left itself open to a nominee like Moore. However, with the information set that the Fed had at the time, with the economy growing above trend, near full employment and its preferred inflation measure near target was there really a compelling case to stand pat? It was not just Powell but all the Governors appointed by Trump did not dissent.
Given other appointments by the Trump Administration to various posts, it is difficult to argue that if the Fed had not hiked rates in December that Moore would not have been nominated. Moreover, many of those broadsides that claim the Fed has brought this on themselves do not begin their narrative at the start but jump forward.
A fair telling would begin with the President publicly and repeatedly criticizing the Federal Reserve. If the Fed did not hike rates in December, some of the same pundits would have argued that the Fed capitulated to political pressures.
Payne suggests that the Fed is being pushed by the right and left to sanction their spending programs. Modern Monetary Theory can be separated from the particular set of policies that some advocate. It is best understood as a description and explanatory model of how the linkages between monetary and fiscal policy. We may help shed light on the performance of US Treasuries in the face of trillion dollar deficit. It helps explain why despite years of QE (see Rinban operations before asset purchases) and low to negative interest rates have not sparked inflation in Japan. The irony is not that the left has suddenly discovered Keynes. The shift is that right has jettisoned fiscal austerity.