There have been numerous sharp, even intemperate, attacks on the Fed by politicians,
principally by Republican members of Congress and presidential hopefuls. These attacks
have been mostly about the FOMC’s policies, particularly its aggressive use of “quantitative
easing.” As such, they are an attempt to influence the FOMC, to pressure it not to ease
further, especially not to pursue further quantitative easing. These developments raise
several questions about the possible impact of politics on monetary policy, both before and
after the presidential election. Here we focus on pre-election considerations. In a later
commentary, we will discuss the implications of the hostility toward the Fed for the Fed’s
independence, including our views on how the conduct of monetary policy might differ
under Obama and Romney presidencies.
POLITICS AND MONETARY POLICY: THE PAST AND THE PRESENT
Throughout the Fed’s history, there have been politicians, including sitting U.S. Presidents, who have forcefully and continually attacked the Fed. For instance, Presidents Lyndon Johnson and Richard Nixon both attempted to influence monetary policy. But since Nixon, U.S. Presidents have almost always scrupulously respected the independence of the Fed. The precedent has been firmly set.
Still, political criticism of the Fed today, mostly by a few prominent Republicans, has been more intense than in the past. The criticism has been more focused on pressuring the FOMC on monetary policy than at any time we can remember since the Nixon administration. Governor Perry wins the prize for the most intemperate and outrageous remark for saying that future asset purchases would be “almost treasonous.” Governor Palin called on the Fed to “cease and desist” with respect to QE, and Representative Paul took it to the extreme with his call to “end the Fed.” In addition, during the Republican presidential primary, most major candidates supported giving the GAO further authority to audit the Fed, including its monetary policy decisions, though Governor Romney recently qualified his support, saying that he wants to keep the Fed independent and does not want Congress to make monetary policy. Nonetheless, Governor Romney, who has indicated that he will not re-nominate Ben Bernanke if elected, has echoed remarks by his earlier Republican rivals by saying that FOMC policies were increasing the risk of inflation, and that the FOMC should not pursue further asset purchases.
The issue we are focused on here is not whether presidential hopefuls are making sound criticisms of the Fed. Our point here is that Presidents, and even presidential hopefuls, should never make near-term monetary policy a political issue in the campaign and, specifically should never exert political pressure on the Fed to try to affect upcoming monetary policy decisions. Such pressure shows blatant disrespect for the independence of the Fed.
WILL THE ELECTION’S PROXIMITY AFFECT THE FOMC DECISION NEXT WEEK?
Will the political climate weigh against any decision to ease further and, especially, to announce QE3 next week? Of course, many have long asked whether presidential elections affect monetary policy decisions, even when there were not such intense political attacks on the Fed. But the question today is asked more earnestly, and more market participants believe this is a serious possibility. Indeed, the perception that the FOMC might be reluctant to act as a result of political pressure may even be built into market prices. If so, we believe that the market is underestimating the FOMC.
We have no doubt that the proximity of the election will not influence the FOMC next week. Allowing monetary policy decisions to be affected by political pressure is tantamount to sacrificing the independence of the Fed. It won’t happen. It’s not in the Fed’s DNA!
POLITICS AND MONETARY POLICY: THE PAST AND THE PRESENT
Throughout the Fed’s history, there have been politicians, including sitting U.S. Presidents, who have forcefully and continually attacked the Fed. For instance, Presidents Lyndon Johnson and Richard Nixon both attempted to influence monetary policy. But since Nixon, U.S. Presidents have almost always scrupulously respected the independence of the Fed. The precedent has been firmly set.
Still, political criticism of the Fed today, mostly by a few prominent Republicans, has been more intense than in the past. The criticism has been more focused on pressuring the FOMC on monetary policy than at any time we can remember since the Nixon administration. Governor Perry wins the prize for the most intemperate and outrageous remark for saying that future asset purchases would be “almost treasonous.” Governor Palin called on the Fed to “cease and desist” with respect to QE, and Representative Paul took it to the extreme with his call to “end the Fed.” In addition, during the Republican presidential primary, most major candidates supported giving the GAO further authority to audit the Fed, including its monetary policy decisions, though Governor Romney recently qualified his support, saying that he wants to keep the Fed independent and does not want Congress to make monetary policy. Nonetheless, Governor Romney, who has indicated that he will not re-nominate Ben Bernanke if elected, has echoed remarks by his earlier Republican rivals by saying that FOMC policies were increasing the risk of inflation, and that the FOMC should not pursue further asset purchases.
The issue we are focused on here is not whether presidential hopefuls are making sound criticisms of the Fed. Our point here is that Presidents, and even presidential hopefuls, should never make near-term monetary policy a political issue in the campaign and, specifically should never exert political pressure on the Fed to try to affect upcoming monetary policy decisions. Such pressure shows blatant disrespect for the independence of the Fed.
WILL THE ELECTION’S PROXIMITY AFFECT THE FOMC DECISION NEXT WEEK?
Will the political climate weigh against any decision to ease further and, especially, to announce QE3 next week? Of course, many have long asked whether presidential elections affect monetary policy decisions, even when there were not such intense political attacks on the Fed. But the question today is asked more earnestly, and more market participants believe this is a serious possibility. Indeed, the perception that the FOMC might be reluctant to act as a result of political pressure may even be built into market prices. If so, we believe that the market is underestimating the FOMC.
We have no doubt that the proximity of the election will not influence the FOMC next week. Allowing monetary policy decisions to be affected by political pressure is tantamount to sacrificing the independence of the Fed. It won’t happen. It’s not in the Fed’s DNA!
Why are we so sure? There is no way to empirically test our judgment, and we might never
know after the decision in September whether or not the FOMC bowed to political
pressure. If the FOMC does not ease, or even if it eases but does not announce QE3, there
will be plenty of buzz about caving into political pressure. The FOMC does not discuss
election-year politics so we will not see anything recorded in the transcripts of the meeting,
released five years afterward, let alone the minutes! In the end, this is a “he thinks, she
thinks” standoff, a question of whose judgment you trust. So, who do you trust? Larry
served on the FOMC for 5 1⁄2 years (only one presidential election); Antulio was on the
Board staff for 11 years (three elections), mostly in the Division of Monetary Affairs; and
David Stockton was on the Board staff for 30 years (seven elections), serving as director of
Research and Statistics for 11 years. We believe that our collective experience allows us to
make a very sound judgment about the effect of political pressure on the Fed. We wish all
our FOMC calls were this easy!
THE CHAIRMAN’S TERM AND THE PRESIDENTIAL ELECTION
The FOMC has a new policy tool, its calendar-based funds rate guidance, which has become an important instrument for easing financial conditions. Introduced in August last year, the guidance was updated in January 2012 to “at least through late 2014,” already well after the (January 2014) end of Chairman Bernanke’s current term. According to the minutes of the last FOMC meeting, extending the guidance was again discussed last month. A legitimate question is whether rate guidance that extends beyond the Chairman’s term is less effective, given that there not only will be a different chairman if Governor Romney wins, but also, most likely, a more hawkish chairman.
The case for diminishing effectiveness of pushing out the rate guidance under current circumstances is plausible, even compelling. In principle, one could test it, but there aren’t enough data. In addition, there is another reason why there might be diminishing returns to pushing out the rate guidance. Presumably, the rate guidance becomes less credible the further out the FOMC “anticipates” the timing of the first rate hike to be. Who knows how the economy will be doing that far out? We assume that the effectiveness of guidance does not diminish for either of the reasons above. We find some support for our assumption in the nearly ten-basis-point drop in the December 2015 eurodollar futures rate on Friday, following Chairman Bernanke’s remarks in Jackson Hole, which we read as suggesting higher odds of a change in the guidance next week. We doubt that any decision made about guidance next week will be affected by election year considerations.
BOTTOM LINE
The FOMC’s decision next week will not be influenced by the proximity of the election. If the Committee decides that macro conditions call for QE3, it will do QE3 despite the resultant political backlash. We cannot be as definitive on the question of whether the proximity to the election and to the end of Ben Bernanke’s term as chairman will affect the effectiveness of further extending the guidance. It is plausible that it should, but we cannot prove it or estimate it. In any case, recent movements in eurodollar futures quotes seem to suggest that the guidance has not lost its edge.
THE CHAIRMAN’S TERM AND THE PRESIDENTIAL ELECTION
The FOMC has a new policy tool, its calendar-based funds rate guidance, which has become an important instrument for easing financial conditions. Introduced in August last year, the guidance was updated in January 2012 to “at least through late 2014,” already well after the (January 2014) end of Chairman Bernanke’s current term. According to the minutes of the last FOMC meeting, extending the guidance was again discussed last month. A legitimate question is whether rate guidance that extends beyond the Chairman’s term is less effective, given that there not only will be a different chairman if Governor Romney wins, but also, most likely, a more hawkish chairman.
The case for diminishing effectiveness of pushing out the rate guidance under current circumstances is plausible, even compelling. In principle, one could test it, but there aren’t enough data. In addition, there is another reason why there might be diminishing returns to pushing out the rate guidance. Presumably, the rate guidance becomes less credible the further out the FOMC “anticipates” the timing of the first rate hike to be. Who knows how the economy will be doing that far out? We assume that the effectiveness of guidance does not diminish for either of the reasons above. We find some support for our assumption in the nearly ten-basis-point drop in the December 2015 eurodollar futures rate on Friday, following Chairman Bernanke’s remarks in Jackson Hole, which we read as suggesting higher odds of a change in the guidance next week. We doubt that any decision made about guidance next week will be affected by election year considerations.
BOTTOM LINE
The FOMC’s decision next week will not be influenced by the proximity of the election. If the Committee decides that macro conditions call for QE3, it will do QE3 despite the resultant political backlash. We cannot be as definitive on the question of whether the proximity to the election and to the end of Ben Bernanke’s term as chairman will affect the effectiveness of further extending the guidance. It is plausible that it should, but we cannot prove it or estimate it. In any case, recent movements in eurodollar futures quotes seem to suggest that the guidance has not lost its edge.
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