The Fed can't win in '24, but it could lose badly

COMMENTARY

The presidential election couldn't be coming at a worse time for the Federal Reserve.

The Fed has tightened monetary policy enough to bring the inflation rate down, but it is not yet clear that inflation will stay at the target level. What to do next is thus a matter of genuine uncertainty- unlike in 2022, for example, when higher interest rates were obviously justified.

That leaves the Fed, which wants to stay above the fray, in a political trap. If it cuts rates, former president Donald Trump and his supporters will accuse Chair Jerome H. Powell of goosing the economy for President Biden. If it doesn't cut rates, Democrats will say it's holding back the economy and helping Trump.

In December, Democratic Rep. Ro Khanna of California said not cutting rates would make Powell "the person most responsible" for Trump's return to power. More recently, Trump has said Powell "looks to me like he's trying to lower interest rates for the sake of maybe getting people elected," and said he would not reappoint Powell if elected. (He had attacked Powell's predecessor for supposedly trying to sway the 2016 election, too.)

Political pressure on the Fed isn't new. Presidents have frequently leaned on it to cut rates during their reelection bids. Trump wanted lower interest rates as president and called Powell an enemy of the people when he didn't get them.

What has been rare is public advocacy that the central bank should seek to influence an election. But that norm has been eroding. In the run-up to the 2020 election, William C. Dudley, former head of the New York Fed, suggested that the Federal Reserve should try to keep Trump from getting reelected because he posed a threat to the world economy. That idea drew pushback, including from the Fed itself.

But Dudley's provocation came before Trump lost the election and then tried to stay in office anyway and before some of his supporters rioted at the Capitol to keep him in power. If the polls stay close, we can expect Dudley's way of thinking to gain more adherents.

Considerations closer to home may push the Fed in the same direction. Financial journalist John Authers has noted that another Trump presidency could lead to the appointment of dubiously qualified loyalists to the institution's board. He reports that there is a "widespread belief in markets that the [Federal Open Market Committee, which conducts monetary policy] will want to do all it can to avert a Trump victory in November."

Powell and his colleagues should resist any such temptation. Our country does not need yet another institution to abandon its mission to indulge its political desires - especially when that institution depends so much on its credibility to fulfill that mission. Nor should the Fed be highly confident in predicting the political effects of its decisions. Some Democrats protested when the Fed began its recent tightening cycle, falsely predicting that unemployment would rise catastrophically. But if the Fed had started tightening earlier, we might not have suffered through as much inflation, and Biden would probably have a higher job approval.

The more predictable the Fed makes its policies - the more it sets them according to some transparent rule - the more it can protect itself from politicians and activists. The more discretion it has, on the other hand, the more political pressure it will invite on itself. The Fed's three statutory mandates - it is supposed to produce moderate inflation, unemployment and interest rates all at once - give it a lot of room to maneuver. Biden has proposed adding a fourth mandate: closing the racial wealth gap. Others want the central bank to do more to fight climate change. As it takes on additional jobs, the Fed risks being seen as a political body just like any other.

Powell is saying the right things. "We do not consider politics in our decisions. We never do. And we never will," he told CBS News early this month. The next time the Fed's governors meet, he might want to distribute some earplugs. The political hectoring of the Fed is just going to get louder.

Ramesh Ponnuru is the editor of National Review and a fellow at the American Enterprise Institute.