Washington and Wall Street are hyperventilating over Trump’s comment yesterday on the Federal Reserve interest rate decisions: “I feel the president should have at least [a] say in there, yeah, I feel that strongly.”
While we believe in Fed independence of political considerations, it is also dangerous that a bunch of lawyers and ivory-tower PhD economists can control the money supply and raise taxes (inflation is a tax) without ANY accountability to anyone – least of all the voters. To borrow the left’s favorite phrase: that’s a danger to democracy.
It’s not as if the Fed is any fountain of wisdom. It was Jerome Powell and his colleagues who accommodated the Biden-Harris spending spree and allowed inflation to rise to 9.1% in the summer of 2022. Sounds like they took their hands off the steering wheel.
It was the Fed that almost sent the economy into a tailspin in late 2017 with interest rates way too high for way too long – and Trump was right to fume at this error.
It was the economic wizards at the Fed that held rates too low for too long in 2006, 2007, and 2008 and caused the greatest financial meltdown since the Great Depression.
It was the Fed that allowed prices to nearly triple in the 1970s until Reagan and Volcker saved us.
The 300 PhD economists sitting in the temple of the Fed have a less-than-stellar track record.
Worst of all, the current interest rate-setting policy has created an entire needless industry of Fed watchers who make a living speculating on what the Fed will do next. That creates an uncertainty that reduces growth.
Trump’s idea of allowing the White House to have a bigger voice isn’t the solution either.
The solution is to take away the Fed’s exalted powers by requiring them to have a price rule to set interest rates – and stop worrying about things a central bank can’t control, such as unemployment, social injustice, or climate change.
One sensible rule would be to use commodity prices as the gage. By holding commodity prices stable, we would have a stable and a strong dollar. Only in an economic emergency – declared by Congress and the President – should the Fed deviate from this rule.
There has to be a better way!
