AP Photo/Mark Lennihan
- President Donald Trump’s latest Fed picks have raised concerns about political interference in monetary policy.
- Policymakers have also questioned the potential nominees’ qualifications to serve on the Board of Governors.
- Economists say that could hinder the central bank’s ability to respond to a recession.
President Donald Trump’s plan to nominate political allies Stephen Moore and Herman Cain to the Federal Reserve has sparked concerns that the independent central bank could be compromised. And with growth expected to slow in the coming months, economists say the stakes couldn’t be higher.
Not only could political interference in monetary policy lead to high levels of inflation or unemployment, it might also limit the amount of leverage policymakers have in the event of a downturn. Raising interest rates can prevent the economy from overheating, while cutting them stimulates activity.
"If a recession does occur in the next year or so, we have a little bit more firepower than other central banks," said Ryan Sweet, an economist at Moody’s Analytics.
While the economy remains solid by almost any measure, the Fed cited signs of slowing activity when it paused its three-year hiking campaign this year. Trump has long been pushing the central bank to pursue stimulus measures, efforts that could be bolstered through his most recent nominations.
Of course, Moore and Cain wouldn’t dictate monetary policy if confirmed by the Senate, which in itself appears to be a tall order. There are 12 members who vote on the Federal Open Market Committee that sets interest rates.
But central banks play a crucial role in guiding expectations for the economy, particularly in the face of the uncertainty associated with recessions. A consensus helps send a clear signal to businesses and consumers, said Josh Wright, a former Fed staffer who is now the chief economist at iCIMS.
"A lot of people might not appreciate that it’s very different from the Supreme Court, where once the votes are counted, the majority wins and the law is settled," he said. "If a dissenter has credibility with financial markets, she or he could blunt the message of the majority or increase concerns about political interference."
Economists also worry a politicized Fed would face outside pressure to roll back regulatory measures. Following the global financial crisis a decade ago, officials put in place a flurry of regulations meant to minimize risk and protect consumers.
"To avoid a meltdown like we had in 2008, you have to have somebody focused on systemic risk and who has the political courage to do something before it happens," said Alice Rivlin, a former Fed vice chair. "They have the power to raise capital requirements, for example, which is an unpopular thing to do. Politicians would put that to their banking friends and supporters who say not to do it, but it might be necessary."
Partisanship aside, an increasing number of policymakers from both sides of the aisle have expressed doubts about the ability of Trump’s nominees to guide the most influential central bank.
"It’s also the question of whether these nominees know anything about the financial system, monetary policy or the other key aspects of the Fed job," said Austan Goolsbee, who chaired the Council of Economic Advisers in the Obama administration. "People worry about encountering a 2008-type event or even a smaller crisis event … and having people in place that have no familiarity with the issues and botching the response."
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SEE ALSO: Economists say the way Trump’s latest Fed pick wants to set interest rates is ‘fringe’ and ‘nuts’
Source: Business Insider – gheeb@businessinsider.com (Gina Heeb)