Is Donald Trump right in saying the Fed is biased?
Commentary
Donald Trump thinks Federal Reserve Chair Janet Yellen is in the bag for the Obama administration, a criticism he has been leveling since last year.
In a phone interview on CNBC, the Republican presidential candidate accused Yellen of “doing what Obama wants her to do” and said that the Fed’s low interest-rate policy is fueling what he called a “false stock market,” warning of a bubble that will hurt the economy when it blows. Trump also claimed that the Fed’s policies are ravaging savers, saying that the “ones who did it right -- they saved their money [and] they cut down on their mortgages … and now they’re practically getting zero interest on the money.”
The motivation? To bolster Obama’s legacy, Trump said. “Any increase at all will be a very, very small increase because they want to keep the market up so Obama goes out and let the new guy ... raise interest rates ... and watch what happens in the stock market.”
Does Trump have a point, or are these the ramblings of a candidate who is prone to wild exaggeration, and even downright falsehoods?
First off, while the Fed is supposed to be a non-political, quasi-governmental institution, the central bank has, in fact, periodically been carried along by the prevailing political winds. Perhaps most famously, economic historians point to President Richard Nixon pressuring the Fed to keep interest rates low in the 1970s, contributing to a surge of inflation.
During World War II, meanwhile, the Fed capped interest rates and essentially handing off monetary policy to the Treasury Department in support of the war effort.
Mindful of this, however, the Fed also has a long history of not changing policy ahead of presidential elections (a rate hike in September 2004 was an exception, but was well expected).
Currently, a Fed reluctance to raise rates could be interpreted as helping to keep stocks aloft ahead of the election -- something that is a clear benefit to the incumbent party and Democratic presidential hopeful Hillary Clinton. Let’s not forget that the Fed itself, via former chairman Ben Bernanke in a Washington Post Op-Ed in 2010, acknowledged that its aggressive monetary policy efforts were aimed at boosting stock prices, among other goals.
Moreover, there is a tacit understanding among Wall Street analysts that the Fed’s eight-year experiment with near-zero interest rates and multiple bond buying programs have bolstered the stock market.
This has been accomplished in a few ways. For example, since the 2008 financial crisis, monetary policy has effectively forced yield-hungry investors out of bonds and into stocks. It has also encouraged corporate leaders to leverage up company balance sheets, borrowing cheaply from the bond market to raise funds to repurchase their own shares and boosting earnings-per-share metrics. Policy has also increased the valuation attractiveness of stocks by lowering the “discount rate” investors use to estimate the fair value of future earnings.
So in the sense this is a “false” market, which would be “truer” without the Fed’s help, Trump isn’t wrong. Fed defenders will counter that Bernanke and Yellen have had a professional, and arguably ethical, obligation to support the economy because of a lack of proper fiscal stimulus out of Washington D.C. The weak household income growth during the economic recovery, along with the large numbers of Americans who have been unemployed long-term, attests to scale of the challenge facing the Fed.
In an ideal world, the recovery would’ve been driven by things like infrastructure investments and tax reform. But it’s not, and it hasn’t.
Over time, the evidence has grown that the stock market is now addicted to the Fed’s cheap money, making it harder for the Fed to normalize interest rates. Fearful that the economy remains fragile, the central bank has dragged its feet tightening policy over the last three years -- ostensibly out of concern that moving prematurely could sink stocks, slow growth and perhaps even trigger another recession.
Now, that reluctance could be interpreted as pre-election favoritism.
To Trump’s claim about the Fed’s political bent, a number of prominent members of the Fed’s Board of Governors (who vote on policy with a handful of the dozen regional Fed bank chiefs, who are on a rotating schedule) seem to lean Democratic. Of course, that doesn’t mean they will exercise their authority to help Hillary Clinton. Research cited by the Washington Post in 2013 found little difference in the policy choices of Fed chairman appointed by Democratic presidents compared with Republican ones.
Bernanke, for instance, was appointed by a Republican president, George W. Bush, and up until 2015, was a registered Republican. He now identifies as an independent.
Conversely, we’re all human, subject to fears and biases. So it’s at least not outside the realm of possibility to assume that Fed officials’ personal feelings could cloud their policy judgment amid what’s shaping up to be the most contentious election in at least a generation.
After all, Fed Governor Lael Brainard, who is firmly against an immediate hike in interest rates, has repeatedly contributed to Clinton’s presidential campaign. Economist Ed Yardeni of Yardeni Research, which advises institutional advisers, notes that Brainard is often mentioned as a potential Treasury Secretary in a Clinton administration. He labels Yellen as “certainly a liberal Democrat at heart.” As noted by Reuters in 2014, the only votes against her Senate appointment were by Republicans.
Fed Governor Daniel Tarullo held several senior positions in the Clinton administration and served as President Clinton’s personal representative to the G7/G8 group of industrialized nations. Fed Vice Chairman Stanley Fischer seems to be more neutral, if slightly left-leaning, in sentiment, coming from the International Monetary Fund and the World Bank (both globalist institutions compared to Trump’s nationalism) and penning a 2001 speech positively reviewing President Clinton’s international economic policies.
All of this demonstrates Trump’s political savvy. Throughout the campaign, he has shown an ability to weld shards of truth onto his signature attack on a political and economic establishment that many Americans distrust.
Ultimately, it will take time to render a verdict on Trump’s charges. No matter who wins in November, the Fed will be looking for opportunities to raise interest rates in the months to come. Only then will finally we see how well the markets and broader economy fare deprived of easy money.
