Importance Of Independent Fed
Many reasons are given for recent fluctuations, some would say gyrations, in financial markets. The Federal Reserve Bank’s decision to increase interest rates is one of them. The moderate quarter percent increases undertaken by the Fed are minor compared to the significant jumps in interest rates during the early 1980s. Yet they still drive investors to worry about the availability of cheap capital, a key component of economic growth. It is understandable for the Fed to raise rates when inflation is ticking upwards. However, inflation has been tamed in the U.S. and in our close trading partners. For 10 years Japan has fallen below its 2 percent inflation target. The reason: a combination of automation coupled with greater competition from global companies has mitigated “cost push” inflation. This occurs when the prices of goods are “pushed upwards” by the demand for higher wages. While unemployment is lower than it has been in almost 50 years, employment of people in their prime working years (25 to 55) has still not rebounded from its pre-recession levels. Instead some of these workers are being replaced by part-time employees. Also, as artificial intelligence makes gains in the workplace, some middle to upper income workers, particularly in fields like insurance, accounting and banking may be replaced by algorithms. For these reasons and others, workers worry about losing benefits such as health care and are less apt to leave their current jobs for higher paying ones elsewhere. As a result, the pressure to “push” wages upward thereby causing inflation has been minor. Another type of inflation, “demand pull,” is created when aggregate demand exceeds aggregate supply. It too has been held in check. Currently aggregate demand is not pulling up prices because globalization has assured that, in most instances, supplies of goods are readily available and that competition keeps prices down. So why is the Fed raising interest rates? The answer lies not in what is currently occurring, but what might happen. With interest rates at this historically low point there is little leeway for the Fed to stimulate the economy by further lowering rates if a recession occurs. This fear of a potential recession with few simulative policy tools available worries Federal Reserve policy makers. The Fed reasons that consumers and investors should accept small, well-planned thoughtful interest rate increases now so to stave off much more serious problems later. Steering an even course for the economy between inflation and full-employment has been the job of the Federal Reserve System since 1913. Created by Congress as an independent central bank, removed from the vagaries of political influence, the Fed has developed into an effective body that maximizes employment while assuring stable prices and economic growth. In its 106-year history the Fed has not always been effective in achieving its goals, but overall, it has realized substantial success. The Fed was designed to be apolitical, not bowing to the whims of any elected official including the president. Most presidents have accepted this reality and focused instead upon the overall fiscal policies of spending and taxing, leaving monetary policy to the Fed. President Trump initially did just this by cutting taxes and reducing regulations. But recently he has dabbled in everything from imposing tariffs, a policy which most economists see as problematic, to trying to positively impact the stock market by requesting the Treasury Secretary to call the presidents of six large banks and then publicly announcing that they are financially sound. That move backfired. Most recently Trump suggested he would fire the chairman of the Fed, an action which may not even be legal, but one that clearly upsets financial and international markets. The Fed’s monetary actions are mainly guided by economic data. For the president to attempt to interfere with the Fed creates further volatility in financial markets and the economy. The U.S. economy is still one of the seven wonders of the world. Please, Mr. President, keep it that way. MICHAEL A. MACDOWELL is managing director of the Calvin K. Kazanjian Foundation and president emeritus of Misericordia University.