President Donald Trump’s mild rebuke of the Federal Reserve’s interest rate hikes may have sent jaws dropping on Wall Street, but presidential criticism of the central bank is hardly unprecedented.
“I am not happy about it,” Trump said in an interview with CNBC Thursday. “But at the same time I’m letting them do what they feel is best.”
CNBC described this as a “stinging and historically rare criticism.” The Wall Street Journal reported that Trump’s remarks “break with tradition that presidents refrain from commenting on monetary policy.” Former Dallas Fed President Richard Fisher told CNBC that the president had overstepped.
“One of the hallmarks of our great American economy is preserving the independence of the Federal Reserve. No president should interfere with the workings of the Fed,” Fisher said. “Were I Chairman Powell, I would ignore the president and do my job and I am confident he will do just that.”
The value of the dollar dropped, gold moved higher, stocks declined, and Treasury yields dipped after CNBC aired the president’s comments, which were part of a longer interview with CNBC’s Joe Kernen set to be aired Friday morning.
Only a few hours later, the White House issued a statement denying that the president’s remarks were a challenge to the independence of the Fed.
Even as he made the remarks, Trump acknowledged he was breaking with the practice of his recent predecessors and was likely to provoke criticism.
“Now I’m just saying what I would have said as a private citizen. Some would say, ‘Oh, maybe you shouldn’t say that as a president.’ I couldn’t care less what they say. Because my views haven’t changed,” Trump said.
“I don’t like all this work we’re putting into the economy, and then I see rates going up,” Trump explained.
The tradition that puts comments about the Fed out of bounds for a president, however, has a much more recent and questionable provenance than the reaction to Trump’s remarks suggest. It has its roots in the policy of Robert Rubin, the former co-chairman of Goldman Sachs who served as Bill Clinton’s Treasury Secretary, who insisted that the Clinton White House not publicly question central bank policies. Presidents George Bush and Barack Obama also largely followed the Rubin rule.
In breaking with the Rubin Rule, Trump is harkening back to the tactics of President Ronald Reagan, a frequent Fed critic.
Reagan criticized the Federal Reserve Board after an unexpected spurt in the U.S. money supply. The jump in the money supply ”sends, I think, the wrong signal to the money markets,” Reagan said in a 1982 press conference. At the same conference, he also declined to take a position on whether Fed Chair Paul Volcker should resign, something that had been called for by Congressman Jack Kemp of New York.
Those comments were echoed a month later in Reagan’s annual economic message to Congress, when he urged the Fed to follow “a policy of gradual and less volatile reduction in the growth of the money supply.”
“Unfortunately, the high and volatile money growth of the past, and the high inflation and high interest rates which accompanied it, were instrumental in bringing about the poor and highly uneven economic performance of 1980 and 1981, culminating in a sharp fall in output and a rise in unemployment in the latter months of 1981,” Reagan said.
Reagan’s Council of Economic Advisers suggested in a report accompanying the president’s remarks several reforms to monetary policy, including setting money supply targets by law or even a constitutional amendment.
Reagan went even further while campaigning in the 1982 midterm elections. At a campaign event in New Jersey, Reagan said that the Fed had been working well in the past several weeks, an implicit criticism of its policies before that. He also raised the question of whether the Fed would work better if the Treasury Secretary was its head, as was the case when the central bank was founded.
Until 1935, both the Treasury Secretary and the Comptroller of the Currency sat on the Fed board. They were replaced by two Fed governors appointed by the president, supposedly to reduce political influence over monetary policy.
Those were not quite off-the-cuff remarks. Earlier that year, Treasury officials had said they were considering “initiating a study of proposals to restrict the power of the Federal Reserve Board. The possibilities cited then included having the board placed under the Treasury Department’s authority, or putting the Treasury Secretary on the board,” according to the New York Times. That provoked public criticism from Volcker and eventually Treasury Secretary Donald T. Regan publicly declared that there was no need for a study into ways to rein in the Fed.
But even as Regan backed off of the controversial study, he felt free to pronounce judgment on the Fed’s policy, saying that he was pleased with the Fed’s operations.
The Fed and Volcker, who had been named chairman by Jimmy Carter in 1979, was wildly unpopular at the time. In an effort to fight inflation, Volcker put in place a very tight monetary policy that sent interest rates soaring and triggered a recession that saw unemployment rise above 10 percent.
Reagan’s conservative supporters on Capitol Hill, including Rep. Kemp, feared the tight monetary policy could counter-act the pro-growth tax cuts they were busy enacting. Like Trump, they didn’t like to see all the work they were doing to improve the economy put at risk by tight monetary policy.
That was hardly the end of Reagan’s outspoken criticism of the Fed. In 1995, Reagan blasted the Fed in the seven-page introduction to his annual Economic Report to Congress. Reagan blamed the Fed for “a sharp reduction in money growth through mid-1982” that “undoubtedly added to the length and severity of the 1981-1982 recession and a similar reduction in money growth in the second half of 1984 contributed to the temporary slowing of economic growth later in the year.”
“On occasion, however, the rate of money growth has been quite volatile, contributing to instability in interest rates and a decline in economic activity,” Reagan said.
William Niskanen, who was then the acting head of the president’s Council of Economic Advisers, was also critical, telling reporters: “They feed booms, and they feed recessions.”
And the council got back into the Fed reform business in the report, suggesting changes that would have made monetary policy more flexible, which at the time meant looser.
Niskanen hinted that there was more to come, telling reporters that “we may have something else in mind” for the central bank.
“The administration is studying other changes to restructure the bank that would make it less independent, but they are being delayed until current Chairman Paul Volcker departs,” according to a Chicago Tribune report.
One of the big reforms urged by critics of Volcker’s Fed was requiring the central bank to immediately announce changes to monetary policy. At the time, the Fed often left markets guessing as to whether it was tightening, loosening, or holding the money supply or interest rates steady. Volcker opposed the reform, but it eventually became part of the Fed’s regular practice, leading to today’s practice of the Fed releasing a statement at the conclusion of each meeting and, more recently, holding press conferences to answer questions from reporters.
Perhaps it should not have come as a big surprise that Trump’s approach to monetary policy is closer to that of Ronald Reagan than presidents who followed a rule created by the former head of Goldman Sachs.