Eric Rosengren, president of the Federal Reserve Bank of Boston, doesn’t jump on Twitter to air his views and grievances. Bound by Fed rules and custom, when he speaks publicly, his words are carefully chosen, reasoned, and modulated.
Such was the case Friday at a panel discussion at Columbia University in New York, where Rosengren made the case for why it’s important to allow the central bank to carry out its dual congressional mandate — stable prices, maximum employment — free of political interference.
“For the Federal Reserve, while long-term goals are determined by Congress, the day-to-day implementation of policies is and should be conducted based on data and technical analysis, independent of short-term political objectives,” he said in remarks prepared for delivery at the annual meeting of the Central Bank Research Association.
Boring? Oh, yeah. But in the language of central bankers it was the same as saying, “Here’s why you need to back off, bro.”
Rosengren, an economist who has run the Boston Fed since 2007, didn’t have to mention President Trump because everyone in the room understood the context of his remarks: a relentless campaign by the administration to undermine the Fed’s credibility and the decision by its policy makers to raise interest rates four times last year.
The latest attack came Friday. Hours before Rosengren spoke, Trump tweeted: “Because of the faulty thought process we have going for us at the Federal Reserve, we pay much higher interest rates than countries that are no match for us economically. In other words, our interest costs are much higher than other countries, when they should be lower.”
That jab, tame by Trump standards, was just one of many he’s thrown at the Fed and chairman Jerome Powell. The president has kept up the criticism even though central bank officials — for their own reasons, including the damage to the economy from the US trade war with China — put additional tightening on hold at the start of the year. The Fed is now poised to cut its benchmark rate by a quarter point at its July 30-31 meeting, an insurance policy against an economic slowdown. (Rosengren told The Wall Street Journal in an interview published today that he was not yet convinced a rate cut was necessary, apparently putting him in the minority among fellow members of the policy-setting Federal Open Market Committee.)
Trump is getting what he wanted, but not for the reasons he thinks. In his mind, continuing to bad-mouth the Fed is good politics.
But, as Rosengren argued in his speech, meddling with the Fed for political gain can be bad for the economy.
He highlighted the case of Arthur Burns, the Fed chairman under Richard Nixon, who yielded to Nixon’s demand for lower rates, a move that economists say helped spark the damaging spike in inflation in the 1970s. That inflation spiral ended only after another Fed leader, Paul Volker, jacked up interest rates, which brought prices down but at the cost of a recession that threw millions of people out of work.
Rosengren said that researchers have found that “countries with more independent central banks have lower inflation rates, compared with countries with less independent central banks. These empirical findings have been used to support the international trend towards central bank independence, but so too have the egregious examples in which some governments use their central bank as a printing press, uniformly leading to poor economic outcomes.”
It’s sad that Rosengren, who was echoing points made last month by Powell, even had to give the speech. Trump’s disregard for the Fed’s operational independence — like his blatant contempt for Congress and just about everyone else who doesn’t agree with him — isn’t surprising in light of his anti-democratic tendencies and admiration for dictators like Putin in Russia and Xi in China. But it is dangerous.