Federal Reserve Chairman Jerome Powell is facing increasing pressure as higher-than-expected inflation complicates future interest rate decisions.
The fact that both Joe Biden and Donald Trump have exchanged views in the past week doesn't make it any easier.
There are historical parallels to this situation. That's the kind of intense persuasion and coercion that Powell's predecessors faced during two outbreaks of inflation in the 1970s.
These pressures tarnished the legacy of Austrian-born economist Arthur Burns, who led the Bundesbank from 1970 to 1978. The central bank's 10th chairman is best remembered for being too sensitive to political demands for lower interest rates.
It's a fate Mr. Powell is clearly trying to avoid.
“It doesn't matter what is written on the election calendar,” he said in a recent speech. “We're going to do what we're going to do, and we're just going to do it for economic reasons.”
array of parallel lines
Fed watchers have been studying the 1970s for decades, trying to learn both economic and political lessons from the period.
“Political pressure on the Federal Reserve was an important factor in the rise in U.S. inflation in the 1970s,” Professor Charles L. Wise wrote in a 2012 paper. Weise and others also point out that economic miscalculations contributed to some of that decade's problems.
Former St. Louis Fed President James Bullard argued that these perceived economic mistakes were the reason Mr. Burns was “on the back burner” of inflation.
He said central banks at the time were probably too focused on non-monetary factors that affect inflation, such as budget deficits and oil prices, and as a result were not aggressive enough on interest rates.
But in any case, both the 1970s and modern times show that political pressure can be surprisingly bipartisan, depending on who stands to benefit.
In both eras, presidents have been passionate about expressing their preferences.
During Mr. Burns' oath of office, then-President Richard Nixon even joked that the applause he received was “an advance vote of thanks for lowering interest rates and increasing funding.”
He added, jokingly, that he respects Mr Burns' independence, but added: “I hope he will independently conclude that my views should be followed.”
Once again, Mr. Powell has been under pressure for years.
Throughout his presidency, Trump constantly pressed Powell to cut interest rates, even pushing for negative interest rates when they were at zero.
Biden has been more cautious since taking office, but has recently shown a willingness to offer public comments.
Just last week, Biden reiterated his prediction that interest rates could be cut by the end of the year despite recent news on inflation, saying new data “could delay a rate cut by a month or so, but… I don't know about that,” he added.
Pressure from Congress was also significant.
Earlier this year, Powell appeared before Congress and faced multiple questions from Democrats about whether rates should be cut.
“Interest rates are too high,” Massachusetts Representative Ayanna Pressley told him in one colorful moment.
Pressures in the 1970s were even more evident, in one case taking the form of a parliamentary resolution calling on central banks to “initiate policies that encourage lower long-term interest rates in early 1975''.
The resolution, sponsored by California Democratic Rep. Thomas Reese, passed both chambers of Congress by wide margins, including a unanimous vote of 86-0 in the Senate.
Pressure to lower interest rates is a feature that Fed chairmen often face, and that could change in November for Powell only in terms of who is applying the pressure.
Republicans from Trump down are now adamant that Powell will keep interest rates high. “The Fed will never be able to credibly lower interest rates,” President Trump wrote on social media this week, accusing Powell of trying to “protect” Joe Biden.
But few expect President Trump to maintain that stance if he wins in November and sees himself in a position to benefit politically from easy monetary policy.
Desire to be remembered as Volker rather than Burns
Mr. Powell clearly wants to achieve a similar legacy to Paul Volcker, who chaired the Federal Reserve from 1979 to 1987 and is remembered as the leader who ultimately defeated inflation. It's obvious.
But even Mr. Volcker faced various political pressures.
For years after Mr. Volcker took office in August 1979, interest rates rose and fell. Mr. Volcker quickly needed to get through the 1980 election season before being able to raise his interest rate to 20%, still an all-time high by 1981.
However, pressure to lower interest rates was still looming. In 1984, President Ronald Reagan and Chief of Staff James Baker called Volcker to the White House and ordered him not to raise rates before that year's election, according to Volcker's memoir.
Mr. Volcker wrote that he was “stunned,” but added that he did not escalate the situation because “we were not planning monetary tightening at the time.”
Instead of responding in any way, Volcker said he left the meeting without saying anything.
He did not want the meeting to be held in the White House library rather than the Oval Office because he did not want President Reagan to be caught doing anything that undermined the Fed's independence, reflecting the still recent Watergate scandal. and that the room “perhaps lacked atmosphere.” This is a taping system. ”
Ben Werschkul is Yahoo Finance's Washington correspondent.
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