The U.S. Federal Reserve was created to pursue its objectives free from political interference, but there have been times when politicians just couldn’t help themselves from offering advice or applying pressure on the central bank to lower rates in the name of political expediency.
President Richard Nixon’s insistence that U.S. Federal Reserve Chairman Arthur Burns lower interest rates before the 1972 election was famously caught on the Oval Office tape recorder.
Nixon was on the defensive, the war in Vietnam was unpopular, and the Fed was raising interest rates.
Nixon wanted Burns to lower interest rates to stimulate economic growth in the run-up to the election.
Burns ceded and ultimately Nixon was re-elected, only to resign in the face of impeachment, in 1973.
“I’m for stable prices” isn’t a great campaign slogan
To understand why political interference is a problem, you must keep in mind what the Fed was created to accomplish when U.S. Congress passed the Federal Reserve Act in 1913.
That act, as well as subsequent legislation in 1933 and 1935 to establish, the Federal Open Market Committee, specified three goals specific to the operation of monetary policy.
The Fed should attempt to achieve maximum employment, stable prices and moderate long-term interest rates, by managing short-term interest rates and making adjustments to the availability and cost of credit.
It was understood that the Fed’s objective of creating long-term prosperity for America could run counter to the shorter-term political aspirations of those seeking public office.
That the term of a Fed Governor is 14 years versus the four-year term of the president evidences the tension between bureaucrat and politician.
“Is this thing on?”
Stable prices, the argument goes, allow consumers and businesses to make rational, informed purchase and investment decisions.
The reality is few, if any, voters will cast a ballot based on the success or failure of a central bank’s ability to achieve price stability.
Issues of jobs, healthcare and taxes are much more tangible – as are the latest Internet headlines.
That said, if positive economic and employment numbers drive the stock market higher, then people are inclined to feel better.
Positive economic data and financial market performance could make people “feel better” and more inclined to vote for their incumbent political representatives for another term.
Let me tell you how to do your job
The notion that politicians would seek to influence or blatantly interfere with the conduct of monetary policy is not unique to President Nixon, although in that instance, the “tapes” were.
That a politician could benefit from lower interest rates and the corresponding economic stimulus it provides has lead presidents from Harry Truman, Lyndon Johnson, Ronald Reagan and George Bush I to privately or publicly admonish Fed officials for being to tight with the purse strings.
President Donald Trump and his officials’ public browbeating of Fed Chairman Jerome Powell and the FOMC is interference on steroids.
As he openly calls for lower interest rates to propel his rocket ship economy, the current president has also threatened to replace the Fed Chair and to appoint sympathetic Governors in Herman Cain and Stephen Moore, although these nominations were subsequently withdrawn.
The sitting president’s very public war with the Fed makes Richard Nixon’s behind-closed-door urgings look downright civil.