Why an independent Federal Reserve?
Over the next two or three weeks you’re going to see a lot more effort on the part of the administration to have discussions with the Federal Reserve to somewhat interject politics into that area. We’ve already seen that a little bit with the criticism that has come along with the recent volatility of the markets. Why do we want an independent Federal Reserve? The bottom line of it comes down to the way that we efficiently manage our economy in the United States. This is done in a couple ways. The first is fiscal policy. This is already a large political component, because, this is what governments at the federal, state and local level do in order to spend money on items like infrastructure, federal and state programs. In other words, spend money politically into the economy. The second part, in which we try to manage our economy, is monetary policy. That’s done by the Federal Reserve and what occurs with interest rates and cost of capital. The reason that we need an independent Federal Reserve is that you need to have part of the overall management of the American economy non-politicized and data-driven. There will be a lot of concern coming up over the next two or three weeks about the administration and the Federal Reserve coming together on these items.
We wanted to let you know that this has happened before. There are two primary historical examples that we can give you in which a president of the United States has tried to enter the fray with what the Federal Reserve feels like is the best way to go on interest rates. One was in The Truman Administration. In 1951 Harry Truman had a meeting at the White House with all the members of the of FOMC, the governing body of the Fed, trying to keep interest rates low coming out of the Korean War in order to spur the domestic economy. Truman came out of that with a meeting saying they had agreed on terms. There were minutes released later by one of the Fed governors saying that that wasn’t accurate. However, the point is that this involvement caused some financial upheaval, even with a very honorable president like Harry S Truman. The second example, and one of the most meaningful economic impacts with a president involving themselves with the Federal Reserve board chair, was just prior to the 1972 election with Richard Nixon. As we know, he was trying to get re-elected, which of course ultimately happened. President Nixon tried to encourage the Federal Reserve chairman at the time, Arthur Burns, to keep interest rates low even though there was a lot of price pressure in the economy. The reason being because it was a valuable part of Nixon being re-elected. What we saw after the election, because there was already a lot of price pressure in the system, is that the Federal Reserve tried to cover inflation and interest rates went up to about 12%.
Independent vs Political
The point we want to make to you today is that you need an independent Federal Reserve that is very data-driven on the economy to work in companion with fiscal policy, which is already politicized. If you may remember we did an educational Vlog about six months ago about the lasting impacts of the 2008 financial crisis, #303 The Financial Crisis. One of the points we mentioned in that Vlog was a more involved Federal Reserve. The Federal Reserve became much more involved in the economy with quantitative easing, post-2008, simply because they had to. There is a lot more focus on the Fed, but it’s our contention that you still need a good Federal Reserve that’s independent. As opposed to fiscal policy that is politically charged.
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