The Federal Reserve System consists of 12 independent regional banks and a central bank in Washington established by Congress in 1913. They are an odd public/private institution– independent but subject to congressional oversight.
The Fed, as it is called, is ruled by a Board Governors headed by the Chair of the Federal Reserve, currently Jerome Powell who was appointed to a four year term by President Trump in February 2019. The head of the Fed is appointed by the president, but not beholden to him. The president does not control the decisions of the Fed.
The job of the Fed system is to control panics and stabilize the banking industry and to set interest rates to help control inflation or promote growth. It is seen as apolitical and is often looked to for clues on how the experts see the health of the economy. For instance, for long after the financial crisis of 2008, the Fed kept interest rates low to encourage borrowing and growth, but eventually, fearing inflation ( a drop in the value of money because it is too easily available) they began to raise them slightly which can cool growth. Not surprisingly, that is exactly what happened. This is how the Fed regulates the economy. Controlling the money supply this way is called monetary policy,, and unlike fiscal policy (controlling the economy through tax cuts and spending, which is in the hands of Congress) monetary policy is supposed to keep the economy away from politics.
This article concerns Larry Kudlow, the president’s economic advisor, whose job is to advise the president but not to lobby the Fed. His actions are another form of the norm-breaking we have seen regularly from the Trump administration. Trump wants to run for re-election during a period of economic growth, something he has already managed to boost through tax cuts he signed. The Fed’s job is to balance that economic euphoria to prevent inflation.
In the broader picture of the federal bureaucracy, there are people who are the president’s people and those who are not. The presdent’s economic advisor is part of the Executive Office of the Presidency (EOP), along with the National Security Council, the Office of Management and Budget, and other advisors who rarely need Senate approval and who serve at the president’s pleasure (i.e., he can fire them if he wants.)
Once you get beyond the EOP and the White House Office (the Chief of Staff, the Communications Office, etc.), the federal bureaucracy is part of the executive branch but the president cannot control it like he can his own advisors. It is often protected from politics or checked by congressional oversight. This is different from the business world and a norm of the office Trump has had particular difficulty adapting to, as we have seen with his struggles to bend the Department of Justice to his will.
Axios PM by Mike Allen 3/29/19
Here’s how not normal things are: The White House economic adviser broke with tradition and waded into Federal Reserve rate setting today.
Driving the news: Larry Kudlow told Axios’ Dion Rabouin in the Fox Business green room that he wanted “immediate” rate cuts by the Federal Reserve, citing 50 basis points (.5%) as a desirable target.
Kudlow then went on CNBC and reinforced his message:
- “I am echoing the president’s view – he’s not been bashful about that view – he would also like the Fed to cease shrinking its balance sheet.”
- “There’s no inflation out there, so I think the Fed’s actions were probably overdone.”
Why it matters: Kudlow’s predecessor, Gary Cohn, knew full well that he shouldn’t comment on monetary policy, Axios’ Felix Salmon emails.
Why it matters: Kudlow’s predecessor, Gary Cohn, knew full well that he shouldn’t comment on monetary policy, Axios’ Felix Salmon emails.
What they’re saying:
- “That is the first sign of panic out of the White House of the rapid deceleration in growth that lay ahead in Q1’19 & the year as a whole. This will not be looked at kindly by the Fed nor the fixed income market which will smell the fear in the air.” – Joseph Brusuelas, chief economist at RSM tells Axios in an email.
The bottom line: Markets barely budged, a sign that they aren’t taking news from the White House as seriously as in the past, Axios’ Dan Primack notes.
What does the lack of market reaction mean? Financial and political actors watch the Fed like fortune tellers watch tea-leaves, to divine how they think the economy is doing and what they are likely to do themselves that affects it. That President Trump could so clearly try to influence the economy for political reasons and be more or less ignored says something about how he is regarded by actors in the market. That he is not taken seriously doesn’t make the behavior less of a norm-breaker.
- Case in point: Stocks didn’t move this morning when Trump threatened to shut the U.S./Mexico border, which would cause massive business disruption.
P.S. Kudlow to Dion on Fed nominee Stephen Moore: “He’s a brilliant guy. I’ve known him for three decades. He knows a lot about monetary policy, knows a lot about tax policy, is pro growth and he understands more people working at high wages that they earn is a good thing, not a bad thing. The Federal Reserve staff argues with that.”
Trump’s economic advisor is again working the media to support Stephen Moore, Trump’s controversial pick to sit on the Federal Reserve Board. Moore is a friend of Kudlow’s who has blamed the Fed for slowing the economy when it began to raise interest rates. (Remember, that the Fed does this on purpose to control growth so inflation does not spiral.)
AmGov, Axios and the News 