Something happened during the first presidential debate that is new in the modern era. Donald Trump insisted, citing no evidence, that the Federal Reserve is one of the most partisan institutions in Washington, “more political than Secretary Clinton.” Some applauded this assault on the Fed, whose monetary policies after the financial crisis have kept interest rates at or near zero. These critics join Trump in viewing the Fed as an assault on the U.S. dollar, inviting an inflationary tsunami that is just around the corner. But for those voters who dread inflation, it is Trump who should keep them up at night, not Fed Chair Janet Yellen.
The problem is, as former Fed chairman Paul Volcker long ago noted, that when it comes to controlling inflation, the Fed quickly becomes the “only game in town.” The U.S. promotes the value of an independent central bank for precisely this reason: Independence gives the Fed some space from the day-to-day of the partisan political process so that it can pursue rigorous, if sometimes controversial, decisions.
Some like to think of Fed independence in excessively legalistic terms—that because the Federal Reserve Act takes the Fed off of the appropriations process, for example, it thereby has all of the independence it should ever need.
This legalistic conception of Fed independence is pure fantasy. Any president has the resources and power to significantly influence Fed decision-making, for better and worse. Democratic accountability demands some of this political control, most noticeably through the political appointment of the Fed’s senior leadership. But presidents can use and abuse the Fed in other ways, too. Richard Nixon’s dominance of his Fed chair, Arthur Burns, is a perfect example. Anyone listening to the Nixon tapes or reading Burns’ diary sees just how closely the two worked together in the political interests of Nixon.
To say that we should value the Fed’s separation from partisan politics isn’t to say that the Fed should become a power unto itself. A president need not bow at the altar of Fed supremacy to protect the tradition of an accountable Fed, independent of electoral concerns. The Fed remains a political institution embedded within a political system. It will face uncertainty in ways that will cause even the experts to split. When they do, it’s appropriate, even patriotic, for politicians—and the public—to question the substance of Fed decision-making.
This patriotic critique is not what Trump is about. His critique isn’t about interest rates or unemployment or asset bubbles. It isn’t really about the economy at all. It’s about power. And once Trump has it, no one should be surprised that he will guard it jealously and continue to undermine those who would share it. We have seen this story before. By accusing the Fed of playing partisan politics, Trump is wagging the dog: the economy’s performance—whether in regards to inflation, consumer confidence, unemployment, middle-income growth, or manufacturing—isn’t consistent with Trump’s preferred narrative that the country is in the grips of an economic devastation “[he] alone can fix.” His is a solution looking for a problem, and so he seeks to change the problem: a public institution responsible for the inconvenient narrative that must be delegitimized.
Trump has used this strategy throughout his campaign. He did it with the federal judiciary, attacking a judge as a biased “Mexican” when the judge ruled against him (the judge is from Indiana). He did it with the U.S. presidency, breathing life into the cartoonish attacks on President Obama’s country of birth when he disagreed with the president’s policy decisions. He did it with governmental statistics, insisting they can’t be trusted when they don’t tell the story consistent with his narrative. And he did it with the military, the media, and even the presidential election process itself. If these institutions can’t produce results that feed Trump’s narrative, then the public trust on which they rely must be destroyed.
Everything about Trump’s style of personality-driven power telegraphs how differently he would approach the question of monetary stability. Given the persistently low levels of inflation, it’s hard to imagine a hyperinflationary future just around the corner. But make no mistake: Come the midterms of 2018, or reelection in 2020, the institutional bulwark against that inflation that the Fed represents will be reduced to rubble.
In this sense, Trump is nothing like his predecessors of the past 40 years—on both sides of the aisle. Jimmy Carter appointed Volcker, who was anti-inflation, at a most inopportune time for Carter’s reelection prospects. Ronald Reagan, Carter’s biggest critic, repeatedly sought to preserve the Fed’s institutional autonomy even though it cost him politically (just see the consequences of the Fed’s monetary policies for President Reagan’s first midterm election). George H.W. Bush, Bill Clinton, George W. Bush, and Obama, even when they disagreed with the Fed—and each one did at various points—they recognized the importance of keeping the Fed an island of nonpartisan expertise.
Trump is the single-biggest challenge to that tradition in recent memory. We cannot claim this wolf comes in sheep's clothing. To invoke Justice Antonin Scalia's ominous warning, this wolf comes as a wolf. The independence of the central bank to set a monetary course separate from the day-to-day of electoral politics is as fragile as it is essential. Any president set on consolidating power away from the Fed and toward the presidency has significant resources to accomplish that goal. What Trump would unleash is bigger than Nixon. At least Nixon's efforts were behind the scenes, leaving an institutional framework in place that could recover after his departure. Trump's political assault on the Fed is transparent. If he succeeds, it could be years before the Fed recovers, if it recovers at all.
Peter Conti-Brown, a legal scholar and a financial historian, is an assistant professor at The Wharton School of the University of Pennsylvania. Conti-Brown is the author of The Power and Independence of the Federal Reserve and is currently writing a comprehensive history of the Fed, forthcoming from Harvard University Press.