US Fed gets ready for a reckoning after Trump's win

He can fill a majority of the Fed's 7-member board with his own nominees over the next 18 months, including replacing Yellen in Feb 2018

Paul A Volcker, the Federal Reserve chairman, received an urgent warning two weeks after Ronald Reagan won the 1980 presidential election. Some of the president-elect’s advisers, he was told, wanted to abolish the central bank and replace it with a computer program that would manage interest rates and monetary policy.

Today, a Democratic Fed leader is once again bracing to see whether victorious and emboldened Republicans will try to overhaul the central bank.

In almost three years as the Fed’s chairwoman, Janet L Yellen has led an aggressive campaign to stimulate economic growth. Donald J Trump, the president-elect, has embraced criticism that the Fed is causing more problems than it is solving, and he has surrounded himself with advisers who would like to rein in the institution that has the greatest influence over the direction of the nation’s economy. 

Trump can fill a majority of the Fed’s seven-member board with his own nominees over the next 18 months, including replacing Yellen in February 2018. He also could work with Congress on new constraints, including some form of an old idea on the right that a formula should dictate the Fed’s movements of interest rates. 

Or Trump could emulate Reagan and leave the central bank alone. When the two men finally met, Reagan asked Volcker why the country needed a central bank. He apparently found the answer convincing. Like other presidents in recent decades, he decided the Fed was reasonably effective and useful as a scapegoat. And in 1983, he nominated Volcker for a second term.

Trump’s intentions are unclear in part because there is a tension between his personal preferences and his political commitments. He is a borrower who now heads the political party that has long represented the interests of lenders. 

Trump has described himself as “a low-interest-rate person,” reflecting his background as a real estate investor who drew heavily on other people’s money. He also has promised to deliver stronger economic growth, a goal that could be inhibited by higher interest rates. Politicians — their careers dependent on short-term economic performance — generally favour low rates, even at the expense of future inflation. That is the very reason the Fed is insulated from political pressure.

Many of the advisers surrounding Trump, however, have long advocated that the Fed focus on controlling inflation, even at the expense of short-term growth. They have argued that the Fed has little power to increase economic activity beyond Wall Street — and on Wall Street, they warn, the Fed is encouraging excessive speculation.

Over the course of the campaign, Trump increasingly echoed those views. In early September, he said the Fed was supporting a “very false economy” by driving asset prices to what he described as unsustainable heights. “We are in a big, fat, ugly bubble,” Trump said during the first presidential debate, a few weeks later.

© 2016 The New York Times News Service