The president probably wasn’t pleased when the Fed raised interest rates. But when the press asked
to comment in 1956, he said: “The Federal Reserve Board is set up as a separate agency of government. . . . It would be a mistake to make it definitely and directly responsible to the political head of state.”
In the 1990s, President Clinton’s economic advisers, led by
initiated a rule that the White House would make no comment on Fed policy, even anonymously. That rule held until last week, when President Trump stated in an interview that he was “not happy” with Fed policy. On Friday he followed up with a pair of tweets. The Rubin Rule is dead.
Some may celebrate its demise. The Fed isn’t supposed to be unaccountable: Politicians name key Fed personnel; Congress is active in its oversight; journalists and other outsiders engage and critique every aspect of Fed policy. That attention can make the job of central banking unpleasant, but it is vital to the Fed’s legitimacy.
What Mr. Trump did was different. The process of pushing interest rates back to historical norms has been and will be among the most uncertain policy programs undertaken in Fed history. Mr. Trump made that fraught process more complicated in two ways. First, he showed himself ready to wage war over the Fed’s decisions even without a market correction or recession—the usual times when politicians start looking for monetary scapegoats.
Second, the perception of the Fed’s decision-making will change immediately. To be sure, the substance of those decisions won’t be so easily swayed. The Fed won’t fold after one tart presidential comment; Chairman
and his colleagues are made of sterner stuff than that. More plausibly, the Fed could overreact and seek to assert its independence by raising rates more quickly than is warranted. That would be a mistake, and it’s still unlikely.
In central banking, though, appearance matters as much as substance. How will the Fed’s decisions be perceived by markets and in political campaigns, in boardrooms and in newsrooms? If the Fed slows rate increases on the merits, the public now is likely to declare a Trumpian victory. If it speeds those increases, it may invite a Trumpian war. Either result would be devastating.
The Fed’s instincts will be to hide from this fight. Instead it should confront it. Central bankers should not give marble-mouthed nonresponses to the inevitable questions about the Trump administration. They should instead be clear with the usual assurances that the Fed hasn’t altered its course based on political pressures. And they should expand on the virtues and fragility of Fed independence and explain that these traditions are mostly for politicians, not central bankers, to honor.
Fed accountability, legitimacy and independence are fragile but valuable ideals that reinforce each other. The president crossed a line last week; the Fed should not be shy in attempting to redraw it.
Mr. Conti-Brown, an assistant professor at the University of Pennsylvania’s Wharton School of Business, is author of “The Power and Independence of the Federal Reserve” (Princeton University Press, 2016).