After many months of criticism and complaints about President Trump jaw-boning the Fed, an influential former Fed governor, Bill Dudley, retaliated in an Op Ed on Bloomberg.  However, instead of taking the high road and defending Fed independence such as a group of former Fed Chairs (Yellen, Bernanke, Greenspan, Volcker) did recently, he took the low road, all but suggesting a weaponization of the Fed to influence a political outcomes.

“There’s even an argument that the election itself falls within the Fed’s purview. After all, Trump’s reelection arguably presents a threat to the U.S. and global economy, to the Fed’s independence and its ability to achieve its employment and inflation objectives. If the goal of monetary policy is to achieve the best long-term economic outcome, then Fed officials should consider how their decisions will affect the political outcome in 2020.”

Read the rest of the op-ed here.

We do believe that at least one of the points he raised, essentially that the Fed shouldn’t be coaxed into responding to the ebbs and flows of trade war tactics and remain true to its “data dependent” philosophy (I’m saying it more politely than Dudley did), has merit.  We previously mentioned our concern that the Fed’s last announcement smacked of data “independence” after all.  But, then he contradicted himself and went “off the reservation” by applying a value judgement to the “correctness” of trade policy — that should concern investors the most.

While Dudley is no longer a Fed governor, he is still closely associated with the Fed and his Op Ed forced the Fed to respond publically by reminding everyone that they are not a political body.  Regardless, and no matter your political beliefs, Dudley’s perspective calls into question the apolitical nature of the Fed even as the President’s comments has called into question its independence.  All of this taken together — every bit of it — serves to further reduce confidence in the Fed and its ability to make decisions.

While we didn’t think it possible, in our opinion, this Op Ed further ties the Fed’s hands and brings added unwanted scrutiny to an already challenging mandate increasing the probability of a policy mistake.

 

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