MNI EXCLUSIVE: Ex-Officials Warn Against Politicizing Fed

By Jean Yung

     WASHINGTON (MNI) - Former Federal Reserve officials warned against mixing

politics with monetary policy after one of their own suggested that the Fed

refrain from lowering rates to offset trade-related damage to the U.S. economy.

     Any tinge of politically-motivated policymaking runs the risk of allowing

President Donald Trump to stoke public animosity toward the Fed, perhaps so much

so that Congress seriously considers narrowing the scope of the Fed's powers,

former Atlanta Fed president Dennis Lockhart told MNI.

     "That would weaken the institution in the eyes of the world with serious

economic consequences," he said. "If suspicions are created that the Fed is

politically oriented in its policymaking, that's going to erode the credibility

of the U.S. dollar and U.S. capital markets over the longer term."

     "The Fed cannot act politically no matter how egregious the provocation may

be," he said.

     Retired New York Fed president Bill Dudley wrote in a Bloomberg Opinion

essay last week that "Fed officials should consider how their decisions will

affect the political outcome in 2020," given that Trump's potential re-election

"arguably presents a threat to the U.S. and global economy," as well as to the

Fed's independence and its ability to do its job.

     On Wednesday, he clarified in a follow-up essay that he was "not trying to

suggest the Fed should take sides in the upcoming election," only that it might

be able to achieve a better economic outcome by pushing back against the trade

war.

     Former Fed Board research director David Wilcox told MNI he detected "zero

sympathy" for the views Dudley expressed among those with whom he's spoken, even

though Trump's repeated attacks on Fed Chair Jay Powell have angered and

saddened a number of people associated with the U.S. central bank.

     Dudley's suggestion is "completely antithetical to anything I experienced

in my 30 years at the Federal Reserve," Wilcox said. "I cannot imagine a

circumstance in which the institution would change its behavior in the direction

Bill was suggesting."

     To do so would amount to a "fundamental violation" of the compact between

the Fed and the public, he said.

     Still, Lockhart acknowledged that Dudley put his finger on a real dilemma:

offsetting the uncertainty related to trade by cutting rates in turn enables

more aggressive trade policies on the part of the administration.

     "By appearing to offset trade-related uncertainty, maybe the Fed is in fact

adding more fuel to the fire of trade uncertainty," he said.

     As president of the New York Fed, Dudley also served as the vice chair of

the Federal Open Market Committee and held a permanent vote on interest rate

decisions. He retired in June 2018.

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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