Ask anyone close to the Federal Reserve and they’ll tell you that political considerations are a non-factor when it comes to setting monetary policy. The Fed’s credibility rests on its independence, after all, and the U.S. economy would capsize if rates were determined by fast-changing political winds. Still, that hasn’t stopped market participants or economists from exploring what effects — if any — are discernible from the pressure that former presidents like Donald Trump or Richard Nixon have applied to central bankers. With Trump leading President Joe Biden in key swing state polls — and as speculation swirls around how a second Trump administration might tamper with the Fed — the White House and economists are warning about how political interference can fuel inflation. University of Maryland macroeconomist Thomas Drechsel published a paper earlier this month positing that political pressure – measured by documented interactions between Fed chairs and sitting presidents from 1933 through 2016 — can “strongly and persistently” contribute to rising prices. The most notable examples involve Nixon’s well-documented efforts to convince then-Fed Chair Arthur Burns to ease monetary policy in 1971. In an interview, Drechsel cautioned that there are clear limits to quantifying “political pressure” but added that his findings amplify how presidential attempts to chip away the Fed’s independence “can only be really bad.” Which brings us to Trump’s Twitter feed. Fed Chair Jerome Powell was a frequent target of the then-president’s online barrages in 2018 and 2019, when Trump often resorted to public cajoling and name-calling in a bid to sway the Federal Open Market Committee to lower interest rates. The Fed ultimately did cut rates in the second half of Trump’s term as the economy was buffeted by the effects of a trade war, geopolitical uncertainty and — eventually — a global pandemic. Trump’s tweets may have played a role in setting the market’s rate expectations, according to Johns Hopkins University Economics Department Chair Francesco Bianchi. Fed funds futures fell when Trump posted, signaling that “market participants expect the President to persistently impact monetary policy,” Bianchi wrote in a paper with Thilo Kind and Howard Kung of London Business School. “That’s not to say that FOMC members do what Trump tells them to do,” Bianchi told MM. “If you have pressure from an administration that then bleeds into public pressure criticizing the Fed – consumers, households [become] upset with Fed policies — it’s enough to maybe create pressure on the Fed to err on the dovish side.” Of course, the Fed does consider qualitative information from businesses and economists when it assesses the state of the economy. (The Beige Book, which examines conditions across the 12 Federal Reserve Districts, will be released at 2 p.m.) That input could be clouded by political divisions. But that isn’t the same thing as Fed officials explicitly taking politics into account. “It’s hard enough to get the economics right here,” Powell said at a press conference earlier this month. “These are difficult things, and if, if we were to take on a whole, another, set of factors and use that as a new filter, it would reduce the likelihood we’d actually get the economics right.” IT’S WEDNESDAY — As always, send tips and suggestions to me at ssutton@politico.com and to Zach at zwarmbrodt@politico.com.
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