President Donald Trump’s decision to fill two vacant positions on the Board of Governors of the Federal Reserve with political supporters has experts concerned about the impact such a move would have on the credibility of the central bank as an independent, data-driven policymaking body, both domestically and around the world.
Last month, Trump said he would nominate Stephen Moore, a conservative economic commentator known for his devotion to supply-side economics, to fill one empty seat on the board. Last Thursday, the president said he planned to appoint Herman Cain, the former CEO of a pizza chain and an unsuccessful candidate for the 2012 Republican presidential nomination, to the other.
Neither Moore nor Cain has the sort of background or experience normally expected of nominees to the board of the world’s most powerful central bank, but each has been a vocal supporter of Trump, who is currently waging a one-sided war of words with the Fed over what he sees as excessively tight monetary policy.
Trump’s campaign to lower interest rates
Trump has put great public pressure on Jerome Powell, the chairman of the Federal Reserve Board, to abandon a plan to gradually raise interest rates over the next few years.
The central bank held rates at or near zero for more than six years during and after the Great Recession, and has been slowly increasing them since early 2016. During the recovery, it also implemented a last-ditch economic stimulus policy, called “quantitative easing,” under which the Fed bought trillions of dollars’ worth of U.S. Treasury securities and mortgage-backed securities as a means of injecting cash into the economy when interest rates could not be forced any lower.
The Fed has been slowly selling off those holdings as the economy strengthens.
Trump has repeatedly demanded that Powell lower rates again, despite the fact that the current target rate of between 2.25% and 2.50%, while higher than it was when Trump took office, is still historically low. On Friday morning, the president took his campaign against the Fed chairman a step further, telling reporters at the White House that the central bank should resume quantitative easing.
“It’s certainly unprecedented for a president to go on camera and give, essentially, an ad-libbed multitiered criticism [of the Fed] and give a specific direction for monetary policy,” said Mark Hamrick, senior economic analyst for Bankrate.
Larry Kudlow, the chief White House economic adviser, said on CNN’s “State of the Union” program on Sunday that Trump isn’t trying to interfere with the central bank’s independence, but that he has “every right to put people on the Federal Reserve Board with a different point of view.”
Kudlow added that Trump wants people on the Fed “who share his philosophy,” while insisting “this is not a political issue.”
If Moore and Cain are able to navigate the nomination process successfully -- something that is far from certain -- they would become de facto representatives of the president on the Federal Open Market Committee, which sets interest rate targets.
Because the FOMC has 10 voting members, they would probably not be able to have an immediate effect on U.S. monetary policy. But the role of the Fed in the U.S. and world economies goes well beyond simply setting interest rates.
Fed’s impact on the dollar
For example, actions at the Fed can have substantial impacts on the value of the U.S dollar.
During the financial crisis, when banks around the world were besieged by depositors looking to exchange foreign funds for the safety of U.S. currency, and bidding up prices in the process, the Fed mounted a massive loan campaign to provide other countries’ central banks with a supply of dollars.
The action went little-noticed at the time, and was broadly seen by experts as a well-considered response to a crisis situation. But in an administration that touts its “America First” policies, loans to foreign countries in the midst of an economic crisis could easily be exploited by political opportunists.
Having two members of the Fed board with close political ties to the president could make executing that sort of policy extremely difficult in the future.
The Fed also plays a large role in the regulation and supervision of the U.S. financial services industry, and works closely with other central banks around the world to prevent and respond to financial crises.
For all those reasons, experts are worried about the effect such a pair of nominations would have on the central bank's reputation as an institution where decisions are made based on rigorous economic analysis.
Moore is a prolific writer and commentator on economic issues, but he has a reputation for getting basic facts and economic theories wrong, often in service of partisan political ends. He has acknowledged that he “will be on a steep learning curve myself about how the Fed operates,” according to published reports.
“Steve is a perfectly amiable guy, but he does not have the intellectual gravitas for this important job,” wrote N. Gregory Mankiw, a Harvard University economist who served as the Chairman of the Council of Economic Advisers in the George W. Bush administration.
Cain, on the surface at least, has a connection to the Federal Reserve System. He served as chairman of the board of the Federal Reserve Bank of Kansas City for a little more than a year and a half. However, Fed Bank boards actually have no responsibilities related to monetary policy or in setting regulatory policy.
In his run for the GOP presidential nomination in 2012, the former CEO of Godfather’s Pizza received considerable attention for his simplistic “9-9-9” tax plan, which aimed at cutting three major tax rates to 9% each. He has also been a vocal advocate of returning the U.S. to the gold standard, a policy almost all economists view as dangerous snake oil, and one that would make Cain an extreme outlier on the Fed board.
Experts say they worry about the central bank’s ability to be a calming presence for global markets if two of the seats on the Fed board are filled by men who economists simply refuse to take seriously.
Fed’s importance in times of crisis
“We learned in 2007-08 that when there is a financial crisis, the world -- everybody from the traders in the bond market to ordinary workers and citizens -- looks to Washington and says, ‘Gosh, this is bad. We hope that there’s some grown-ups in charge who can reassure us that things are going to be alright,” said David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, a Washington think tank.
Wessel said Trump’s key economic policy figures, like Treasury Secretary Steve Mnuchin and National Economic Council Chairman Kudlow, were chosen more for loyalty to the president than for their policymaking acumen. There may be nobody with the gravitas to reassure global markets in the event of a major economic disruption, he added.
“That means the institution to which people will be looking in a crisis is the Federal Reserve,” Wessel said. “That’s just one more reason why it’s important that the Federal Reserve be seen as an island of sanity and competence in a city where everything else seems to be chaos and polarized politics.”
To be sure, neither Moore nor Cain is guaranteed to wind up on the Fed Board in the end. Both would have to be confirmed by the Senate, and would carry considerable baggage into their confirmation hearings.
Moore’s checkered financial past
Moore, for instance, was once found in contempt of court for failure to pay some $300,000 in child support and alimony after a divorce. He also owes the federal government more than $75,000 in unpaid taxes and penalties, according to a lien filed in federal court last year.
Cain had to end his bid for the Republican presidential nomination in 2012 after at least five women came forward to accuse him of inappropriate sexual behavior. He denied the accusations but was forced to withdraw from the race.
Even if both men were to fail in the nomination process, though, critics like Wessel say that the very willingness of the president to nominate them in the first place is damaging.
“It makes people wonder, what is the president doing to our institutions if he is willing to put people like this on the most important economic body in the world?” he said.