Last week, Bill Dudley set the world on fire with an Op-Ed calling for the Fed to orchestrate the ouster of Donald Trump.
That is not hyperbole. Dudley came as close to saying “coup-by-technocrat” as you can come without using those words.
“There’s even an argument that the election itself falls within the Fed’s purview”, Dudley wrote, adding that because “Trump’s reelection arguably presents a threat to the US and global economy” and thereby to Fed’s capacity to achieve its objectives, “Fed officials should consider how their decisions will affect the political outcome in 2020”.
To be clear, Dudley was 100% correct right up until he began suggesting the Fed should engineer election outcomes.
The rest of the Op-Ed was essentially a rehashing of familiar points about the extent to which cutting rates as trade tensions escalate has been shown to encourage Trump, who has quite clearly figured out that compelling easier monetary policy is a simple as creating chaos. That chaos manifests itself in front-end rates pricing, which effectively corners the Fed.
That’s not a position the president should put policymakers in and if the Fed is enabling the trade war with rate cuts, well then it makes no sense to cut rates given the US economy remains on sound footing (or at least it was still on sound footing as of the July cut).
Dudley’s remarks to that effect are familiar. We’ve been over that merry-go-round here on countless occasions, and analysts generally agree. We even made a flow chart which illustrates the problem (adapted from a similar schematic found in a BofA note out over the summer):
But that’s something different from suggesting the Fed should actively seek to usurp Trump. As funny as it would be to see Jerome Powell exact revenge for all the verbal abuse Trump has put him through over the past 15 months, if the Fed were to use monetary policy to toss out a sitting president, it raises questions about whether they might do it again down the road. It’s easy to say “Trump is different”, but once you wield enormous power, it’s difficult to disown, something the Fed knows all too well after a decade of controlling and contorting markets.
Well, on Wednesday, Bill Dudley penned a new post for Bloomberg called “What I Meant When I Said ‘Don’t Enable Trump’”.
Dudley begins by explaining what motivated him to write the original Op-Ed and, unsurprisingly, he cites Trump’s August 23 tweets.
“President Trump’s trade war with China was increasing uncertainty [and] just a few days before the article was published, the president ordered US firms to pull out of China”, Dudley wrote, on the way to reminding readers that in the course of seeking to scapegoat the Fed for any economic damage from the trade war, Trump went so far as to “characterize Chairman Jerome Powell as an ‘enemy’ — on par, in his view, with President Xi Jinping of China”.
In other words, Dudley isn’t buying the notion that we should all try not to take Trump literally. And indeed, why should we buy into that? After all, Trump insists that we should take him seriously, and more often than not, things that seemed like jokes last week, turn into policy later.
Next, Dudley underscores the risks. “In my judgment, there is a risk that the Fed, by easing, might encourage the president to take even more aggressive actions on trade and in raising tariffs [and] this might create even greater downside risks for the economy that monetary policy might prove ill-suited to address”. Remember, past a certain point, the tariffs will drive up domestic prices (even if they create a deflationary impulse more broadly as the growth effects engender demand destruction) and exert a severe drag on growth. If growth falters while consumer prices rise, there is no adequate monetary policy response. In that scenario, cutting rates risks exacerbating price pressures, but not cutting rates risks a deeper slowdown.
On top of that, Dudley says he worries that the public, not famous for its understanding of monetary policy, would likely take the president’s bait and blame the Fed.
“Not only might the Fed be unable to rescue the economy, but it also might be blamed for the economy’s poor performance”, Bill says, adding that “this risk is higher because of the president’s ongoing attacks”.
It’s also higher because the Fed missed the last bubble before it burst, something a lot of Americans are aware of, even if they can’t recount the specifics.
So, what about the suggestion that the Fed engineer election outcomes? How does Bill explain that?
Well, he’s refreshingly candid, actually.
“My intention was to be provocative”, he writes on Wednesday, noting that he wanted people to explore “where logic might take you if you started with two premises”, the first being that Trump’s trade war is probably bad for the domestic economy, and the second being that the Fed’s goal is obviously to “achieve the best long-term economic outcome with respect to employment and inflation”.
Having said that, Dudley gets to the questions at the heart of the debate. Here’s the most pressing one of the bunch (he presents his new piece in Q&A format):
Q. Do you think the Fed should conduct monetary policy with an eye on influencing the outcome of the 2020 presidential election?
A. I do not. Doing so would be far outside the scope of the Fed’s authority and clearly inappropriate. Moreover, the Fed would be perceived as partisan and such a perception would likely compromise the Fed’s independence. Behaving in such a manner not only would be wrong, but it also would not be in the Fed’s interests.
That’s obligatory, but it doesn’t resonate. Dudley clearly meant that this Fed should try to oust this president. That certainly doesn’t mean that Dudley believes the institution should ever do something like that again, but it’s hard to reconcile Bill saying he doesn’t think the Fed should play a role in the 2020 vote with what he said last week.
Indeed, he addresses that in the very next paragraph.
“How do you reconcile that with what you wrote?”, he asks himself, before delivering an unconvincing answer as follows:
I think central bankers should be aware of all the factors that affect the economic outlook. What the Fed does or doesn’t do can influence electoral outcomes, which in turn can have consequences for the economy and for monetary policy. But the Fed should never be motivated by political considerations or deliberately set monetary policy with the goal of influencing an election.
As for whether he’s a regular Benedict Arnold, Dudley says he doesn’t see it that way.
“I support pushing China for concessions on trade [and] I have repeatedly said that the US has legitimate grievances”, he writes, before noting that despite those grievances, trade wars are not “easily winnable” and “the Fed shouldn’t be attacked for the economy’s performance when the president’s own actions are creating the downside risks”.
It’s hard to argue with that.
Finally, Dudley addresses two other pressing questions. We’ll leave you with the truncated version:
Q. Do you think the Fed has been politicized?
A. In my view, President Trump’s persistent attacks on the Fed have politicized the central bank.
Q. Is the opinion article all your own, or did Fed officials play a role?
A. The article is mine and mine alone. Fed officials were not involved in any way. There is no “deep state” or conspiracy that I am part of.