Yesterday, Jerome Powell said, following the Fed’s decision to raise its policy rate: “political considerations play no role whatsoever in our discussions”.
In some important senses, this cannot or at least should not be true.
Trump has on several occasions commented in public to the effect that he would prefer the Fed not to raise rates. The reason is an old one, and relates to why central bank independence was thought a good idea in the first place. Trump has not wanted the Fed to curtail the kick to the economy that intended when pushing through the tax cut earlier this year.
Powell may be telling the truth to the extent that he means ‘we will not moderate rate increases just because you told us you don’t want us to’. But that does not mean that political considerations don’t come into interest rate discussions.
Trump’s comments could well influence expectations of future policy setting because either markets think that Trump and his advisors are learning something that they will realise the Fed is also learning, or because they think that maybe in these febrile times of strained constitutional relations the Fed will strike a compromise in its interest rate decision-making.
Observers might be forgiven for making this calculation: we are in a new world after all, with Trump’s GOP. And although the Democrats now have control over the lower house, the consensus about what central banks should be doing and how they should do it is breaking down, with dissidents on the left and the right. So surmising that the Fed might conceive of a moderated hiking trajectory as moving down a corridor of least resistance has some logic to it.
To the extent that that happened, the Fed’s actual interest rate decision is unavoidably affected by those political decisions, albeit indirectly. Moderated expectations of rate hikes lower long rates and the cost of finance, and boost spending. Other things equal, this will have the effect of leading rates to be higher!
Those who could parse and understand the Fed’s reactions perfectly would know that higher rates was an indirect consequence of ‘political considerations’. But for anyone else such a reaction could look like deliberate and extra-aggressive counter-inflationary policy designed to make a point to the administration.
So, to recap, while the Powell’s FOMC might not be asking themselves what Trump wants them to do, and whether they should do it. They will have asked themselves what the effect of Trump’s asking has had on expectations of what they will do, and they will have had to respond to that. ‘Political considerations played no role whatsoever’… may be the sort of thing that central bank Governors should say at a press conference, but it is not strictly true.