Federal Reserve Bank's 'myth of political neutrality' now is dead and gone
With remarkably little fanfare, an enduring progressive political fairytale has been debunked by an insider. The Federal Reserve System was created in 1913 under progressive president Woodrow Wilson, as one of those supposedly politically neutral federal bureaucracies run by technocrats in the interest of the greater good. It was to take monetary policy decisions out of politics and put them in the hands of experts.
Donald Trump is only the most recent POTUS to discover that the Fed wields enormous political power, able to speed up or slow down the economy via its manipulation of interest rates and the money supply. He is far from the first president to complain about the Fed when he perceives it as hampering his growth agenda.
What is different is that one of the top officials of the Fed in recent years has fought back and urged the Fed to operate so as to exert political influence against Trump.
Former New York Fed President Bill Dudley is calling on the central bank not to help President Donald Trump fight his trade war with China.
In a sharply worded commentary to his one-time colleagues, Dudley urged Fed officials not to lower interest rates simply as a backstop while the president continues his tit-for-tat tariff battle with the Chinese that has escalated in recent days.
"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 wrote in a post on the Bloomberg News site.
Dudley went so far as to suggest the Fed could — and should — try to influence the next election against Trump.
"After all, Trump's reelection arguably 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," he wrote. "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."
Keep in mind that the Federal Reserve lacks any direct accountability to the people of the United States. It is only by a president appointing and the Senate confirming members of its boards that any public accountability operates. Once in office, they are autonomous. To have this corporation, technically owned by its member banks, self-consciously acting as a political force strikes at the heart of its legitimacy.
One of the few people to notice and protest is Americans for Limited Government (ALG) president Rick Manning, who issued a statement on Tuesday following Dudley's admission:
The myth of the Federal Reserve's political neutrality has been busted by former New York Federal Reserve President Bill Dudley's non-plussed [sic] urging of the Fed to take 2020 political calculations into account when setting monetary policy in order to defeat President Trump in the election. Now that the illusion of a politically neutral Fed has been annihilated, President Trump's recent focus on the failure of the central bank to take into account competitive devaluations by China and Europe to boost exports, and of exchange rates is vindicated.
Senator Rand Paul long has demanded an audit of the Federal Reserve. And many conservatives believe that its undemocratic exercise of power not only offends our political ideals, but ends up creating a currency that steadily is devalued, taxing accumulated wealth beyond the dreams of progressives.
It's time to re-evaluate Woodrow Wilson's handiwork, the same way we re-evaluated and junked his segregation of the Armed Forces.
Hat tip: John Dale Dunn.