Last week Hillary Clinton denounced Donald Trump for his comments on the Federal Reserve Board. Since Donald Trump called on the Federal Reserve Board to raise interest rates, which would slow the economy and destroy jobs, denunciations were certainly appropriate.
But that is not the reason Clinton criticized Trump. Clinton said:
“You should not be commenting on Fed actions when you are either running for president or you are president.”
If you’re wondering where this view came from, it’s known as the guiding doctrine of the “church of the sacred Fed.” This religion is most closely associated with Robert Rubin, the notorious Wall Street banker and treasury secretary under President Bill Clinton.
According to church doctrine, political figures, as mere mortals, are not supposed to talk about the interest rate policy pursued by the Federal Reserve Board. They are supposed to leave this in the hands of the select group of people who have been anointed into the church of the Fed.
Many of us have problems with Robert Rubin’s doctrine. First and foremost there is a serious issue of who gets anointed. The Federal Reserve Board’s Open Market Committee (FOMC) that decides interest rate policy has 19 members. Twelve of these members (five of the voting members) are the presidents of the Fed’s 12 district banks. They are selected through a process that is largely dominated by the banks in the district.
The other seven members of the FOMC are the Fed governors. The governors are appointed by the president and approved by Congress. Their terms last 14 years, to ensure substantial independence from day-to-day politics.
At the moment, there are only five sitting governors because the Republican senate refuses to vote on President Obama’s appointees. This means that 12 of the 17 sitting FOMC members, and five of the 10 voting members, owe their appointments primarily to the banks rather than democratically elected officials.
This is a problem for monetary policy since bankers are likely to be more concerned about inflation and less concerned about unemployment than the rest of us. At least two of the bank presidents have been yelling for years that the Fed needs to raise interest rates to stem inflation, even as inflation has consistently come in well below the Fed’s targets.
The Robert Rubin church of the sacred Fed doctrine says that there is nothing that ordinary mortals can do about this, since only the ordained can talk about Fed policy. This means that if the Fed wants to raise interest rates and throw millions of people out of work, the president should just smile and let them.
For what it’s worth, the Robert Rubin doctrine would seem to directly contradict the Democratic Party platform that was just approved at the convention this summer. That platform says:
“We are committed to doing everything we can to build a full-employment economy, where everyone has a job that pays enough to raise a family and live in dignity with a sense of purpose.”
This commitment to full employment seems hard to reconcile with the Robert Rubin view that presidents and presidential candidates should not talk about Fed policy. If the president says nothing as the Fed acts to throw people out of work, how exactly are the Democrats going to be getting us to a full employment economy where everyone has a decent job?
While the Wall Street types might prefer that the rest of us leave Fed policy to them, it is a bit hard to justify this approach. We can respect the independence of the Fed to make specific decisions on interest rates, while still expecting our elected officials to provide general direction. After all, few people seem troubled either by the fact that Clinton will refuse to appoint a Supreme Court justice who does not respect Roe v. Wade or by her commitment to see the Citizens United decision overturned. And certainly we have more reason to be concerned about the Supreme Court’s independence than the Federal Reserve Board’s.
Perhaps the best analogy for the role of politicians with regard to the Fed is the Food and Drug Administration (FDA). No one wants our politicians deciding which drugs get approved. But if the FDA went five years without approving any new drugs, then we would probably expect Congress and the president to change the way the FDA was assessing drugs.
Similarly, if the Fed were to start raising interest rates at a time when the labor market is still weak by many measures, and there is no evidence of inflation anywhere in sight, then we should expect elected officials to express concern. The Fed’s role is especially important at a time when Congress is controlled by a party that shows no interest whatsoever to hasten the pace of job creation and economic growth.
In short, Clinton was absolutely right to criticize Donald Trump for his comments on the Fed. But she should have done so based on the principles of the party platform, not Robert Rubin’s doctrine of the sacred Fed.