As I saw it, the combination of the trade war and the president’s attacks on the Fed threatened to put the central bank in an untenable position. President Trump was shifting responsibility for the downside risks from his trade war onto the Fed. I thought this was an important issue worth exploring.
What were your key messages?
I wanted to make two points.
First, the Fed needs to be cautious that it does not inadvertently enable the president’s trade war with China.
As I wrote: ‘what if the Fed’s accommodation encourages the president to escalate the trade war further, increasing the risk of recession? The central bank’s efforts to cushion the blow might not be merely ineffectual. They might actually make things worse.”
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. This might create even greater downside risks for the economy that monetary policy might prove ill-suited to address.
But the Fed’s problems might not end there. Not only might the Fed be unable to rescue the economy, but it also might be blamed for the economy’s poor performance. This risk is higher because of the president’s ongoing attacks on the Fed.
I wanted the Fed to be more explicit that the greatest risk to the economy was the uncertainty created by the US trade war with China. By making this clear, the Fed would increase President Trump’s stake in that downside risk. As a result, with more at stake, the president might be more attentive to the risks the trade war posed to the US economy.
Second, I raised the possibility of the Fed going even further: “Officials could state explicitly that the central bank won’t bail out an administration that keeps making bad choices on trade policy, making it abundantly clear that Trump will own the consequences of his actions.” And I concluded: “There’s even an argument that the election itself falls within the Fed’s purview. After all, Trump’s reelection arguably presents a threat to the US and global economy, to the Fed’s independence and its ability to achieve its employment and inflation objectives. If the goal of monetary policy is to achieve the best long-term economic outcome, then Fed officials should consider how their decisions will affect the political outcome in 2020.”
Here my intention was to be provocative. I was exploring where logic might take you if you started with two premises: 1) President Trump’s trade war was likely to be bad for the US economy, and 2) the Fed’s goal is to achieve the best long-term economic outcome with respect to employment and inflation. In such circumstances, how should the Fed behave and what should it consider?
I was suggesting that if the Fed pushed backed that it might be able to achieve a better economic outcome. I was not suggesting that the Fed should do so regardless of the consequences for the economy or that it should stand by and allow a recession. And I was not trying to suggest that the Fed should take sides in the upcoming election.
Do you think the Fed should conduct monetary policy with an eye on influencing the outcome of the 2020 presidential election?
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.
How do you reconcile that with what you wrote: “Fed officials should consider how their decisions will affect the political outcome in 2020.”
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.
Some believe you were disloyal to the country because you were critical of President Trump’s trade war with China. What is your reaction to this?
I support pushing China for concessions on trade. I have repeatedly said that the US has legitimate grievances, particularly in the areas of market access, the protection of intellectual property rights and cybersecurity. The president should be taking a tough line with China on these issues. I support that.
That said, I part company with the president in two ways. First, I don’t believe that trade wars are easily winnable. In this regard, I think the president is incorrect about what causes trade imbalances and who bears the cost of tariffs. Second, I don’t think the Fed should be attacked for the economy’s performance when the president’s own actions are creating the downside risks.
Do you think the Fed has been politicised?
In my view, President Trump’s persistent attacks on the Fed have politicised the central bank. People now wonder whether the president’s attacks are influencing the Fed’s decisions. For example, if the Fed eases monetary policy further at its upcoming September policy-making meeting, people are likely to wonder about the motivation. Is it concern about the economic outlook, or the president’s attacks on the Fed? In contrast, I don’t believe the Fed is politicised in the sense that it would consider trying to influence election outcomes.
Is the opinion article all your own, or did Fed officials play a role?
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. Fed officials are not using me as a vehicle to signal their unhappiness with the president’s attacks on the central bank and on Chairman Powell.
I wrote the article to express my concern that the president had placed the negative economic consequences of his trade war at the feet of the Fed, and that Fed officials had not pushed back against this more forcibly.
Bill Dudley is a senior research scholar at Princeton University’s Center for Economic Policy Studies. He served as president of the Federal Reserve Bank of New York from 2009 to 2018, and as vice chairman of the Federal Open Market Committee. He was previously chief US economist at Goldman Sachs.