Dudley’s really bad advice
This advice from former NY Fed President Bill Dudley is really bad:
“I understand and support Fed officials’ desire to remain apolitical. But Trump’s ongoing attacks on Powell and on the institution have made that untenable,” Dudley wrote, referring to Fed Chair Jerome Powell. “Central bank officials face a choice: enable the Trump administration to continue down a disastrous path of trade war escalation, or send a clear signal that if the administration does so, the president, not the Fed, will bear the risks — including the risk of losing the next election.”
This is how the Fed loses its independence. Ironically, at the moment the Fed has more independence than at any time in its history. It knows that Congress is totally gridlocked, and that the Democratic House would fully support the Fed in any battle with Trump, over any issue. Congress is not about to rein in their power. But as much as I’d like to see Trump lose the next election, this is a lousy idea.
Instead, the Fed should be asking Congress to give them more power to prevent the next recession. Call it a “pro-growth monetary policy”. Both the Dems and the GOP would lap that up right now. I’ve provided numerous suggestions in other posts.
BTW, this Dudley comment tends to confirm my view that Trump’s pressure is likely to have either no effect or lead to tighter money. Why would Trump do this, knowing how a prickly independent institution would react to his pressure tactics? This is why I continue to insist Trump’s not a master dealmaker. Since taking office he’s failed at every single attempt to twist arms to get his way. Remember when he needed McCain’s vote to repeal Obamacare, and he insulted McCain by mocking the fact that he was captured and tortured by the North Vietnamese. How dumb can you get? In contrast, LBJ knew how to persuade people—that’s what a master manipulator actually looks like.
Here’s the NYT:
It is unclear whether Mr. Trump has the legal authority to demote Mr. Powell, who was confirmed by the Senate to a four-year term as chair. Mr. Powell’s term as a governor does not expire until 2028.
If Mr. Trump did try to strip Mr. Powell of his title, the currently 10-member Federal Open Market Committee — which sets interest rates and selects its own chair — might elect him as its leader, one Fed official said on background.
That would create an unprecedented power divide, with Mr. Trump’s new nominee serving as chair of the Board of Governors, assuming that person was confirmed by the Senate, and Mr. Powell heading the policy-setting committee.
Should the Fed adopt this “nuclear option”? I’d say only if it was needed to fulfill their congressional mandate. The Fed needs to be like the computer HAL in the film 2001—focused like a laser on achieving its goal. (I hope it will have better judgment than HAL.) The Fed should only do this end run around the newly appointed chair if that person threatens to push the Fed off course. And I don’t expect that to happen—I doubt the Senate would approve a candidate who is that whacky, and I doubt the other Fed policymakers would vote with him or her if they did.
BTW, I see that respectable people are coming around to my longstanding claim that America is now the world’s rogue nation:
“We are in a system in which things are getting worse day by day, and it’s not a service to anybody, at least privately, to not focus on what the key problems are — and they would be the behavior of the United States, unfortunately,” Stanley Fischer, a former Federal Reserve vice chairman appointed by Mr. Obama, said at the event.
The NYT did not mention the fact that technically it is the Board of Governors that sets IOR, not the FOMC. That’s one reason why I believe the current IOR program is illegal. As implemented, the IOR is often set at a rate above short-term market rates, even though Congress instructed them not to do so. (The Fed relies on a technicality for violating the clear meaning of the law.)
This is important, as Congress clearly did not intend this sort of floor system, where the regional Fed presidents would be disenfranchised. The point of IOR was to make the opportunity cost of holding reserves lower, not to create a dramatically different monetary regime, where monetary policy would be implemented via changes in the demand for base money, not the supply of base money (as prior to 2008.) I defy anyone to find any evidence that Congress intended such a radical policy shift when this change was rushed through in early October 2008.
When asked if they would ever do such a thing, have the Board take over policymaking from the FOMC, Fed officials tend to recoil in horror. “Of course we’d never defy the clear intent of Congress.”
You can’t say Fed officials don’t have sense of humor.
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27. August 2019 at 15:41
Only a central banker could mouth such effontry as has Dudley.
I happen to disagree with certain elements of Trump’s foreign policy. But let us suppose the Trump’s policies regarding China are in the national security interests of the United States. Certainly an elected leader has more right to make that determination than the Federal Reserve board.
Dudley comes very close to saying, “We disagree with Trump’s foreign policy, ergo we are going to tank the economy.”
Should the US Federal Reserve board move to undercut US sanctions on Iran and North Korea? Personally I happen to disagree with those sanctions but shouldn’t that decision be made by the elected President, not the Federal Reserve board?
But perhaps the most lugubrious element of Dudley’s incredibly obtuse commentary is that the trade sanctions on China are but a very small element in what appears to be a slowing global economy. Scott Sumner has done the math on the China trade tariffs. But as a matter of scale, ponder this: Trump’s proposal to raise a 10% tariff on $300 billion of Sino imports means a $30 billion tax increase on the US economy (actually, China exporters will bear part of that $30 billion, but let that go.)
The US presently collects $3.9 trillion in taxes annually and that does not even account for state and local governments.
The hysteria over the China trade tariffs in no way is matched by the scale of their importance.
The Federal Reserve board’s job is to maintain the domestic economy trending towards a GDP target.
In the last few decades, the propensity of central bankers is to suffocate economies and they appear to be ready to do it again, this time while wrapped in a mantle of virtue and perched upon the very pinnacle of self-righteousness.
President Ronald Reagan advocared placing the Federal Reserve into the Department of Treasury, where it would ultimately report to the Oval Office. Better that than a Federal Reserve that decides when to support a US president as he makes policies.
27. August 2019 at 15:46
We were just joking around the water cooler that his comments are counterproductive. At this point, he’d be better off trying reverse psychology.
“SAD LOSER JEROME POWELL DOESN’T HAVE THE BALLS TO CUT RATES! RAISE RATES NOW & STOP PUNISHING SAVERS!”
Or something like that.
27. August 2019 at 16:05
It’s pretty rare that someone pens a hot take capable of causing immediate and serious damage to one of America’s key political institutions. But Bill Dudley may well have pulled it off! Today in Bloomberg, Dudley argues that the Federal Reserve should punish Donald Trump for his trade policies and actively sabotage his reelection bid by allowing the economy to tank.
The idea is awful on its merits. People would lose their jobs, their health care, etc. But what elevates the piece to truly epic heights of irresponsibility is that, until last year, Dudley served as the president of the Federal Reserve Bank of New York, widely viewed as the Fed’s second most powerful position. He is an insider’s insider, and if ever a single piece of writing could fuel conspiracy theories that a cabal of central bankers is out to sabotage Trump’s presidency, this one is it.—Slate.
I have not looked at Slate in a long time, but perhaps I should.
27. August 2019 at 16:17
By the way, you do not need to be a conspiracy theorist anymore to believe that DC globalists are out to get Donald Trump.
Dudley has laid it out bare.
I am taking off my tinfoil hat. So who is crazy and who is not? A
The former president of the New York Fed has publicly advocated that the Fed should sabotage Donald Trump’s re-election campaign as the central bank believes in “free trade” and globalism, and that Trump’s trade policies towards China are inconsistent with the righteous path.
PS… who is Bill Dudley working for now?
27. August 2019 at 16:29
LOL at all the people who REALLY tried to believe the Fed ever was ‘independent’.
27. August 2019 at 17:55
Add on (sorry):
A study in contrasts:
The political leadership of Switzerland decided a few years back that the appreciating Swiss franc would deeply injure the Swiss tourism, manufacturing and farm sectors. Sych a disruption to Swiss society was ruled out.
The Swiss National Bank responded with a huge (in per capital terms) global bond buying program to drive down the value of the Swiss franc, and explicitly stated that was it goal. (Hard as it is to believe, the Swiss National Bank has nearly $800 billion of “foreign currency investments.” The Swiss population is about 8 million. The SNB has purchased nearly $100,000 in foreign bonds for every Swiss resident to pursue Swiss franc stability.)
Or…should have the Swiss National Bank instead have proclaimed its independence and belief in orthodox macroeconomic theories and “free trade,” and done nothing?
https://www.snb.ch/en/iabout/snb/annacc/id/snb_annac_balance
27. August 2019 at 18:08
In a list of rogue nations, which is more “rogue”?
Russia (Crimea, Ukraine, Georgia …)
China (South China Sea, seeking pervasive control over Chinese diaspora, macro-corrupting Africa)
US (economic misbehaviour)
It looks more like a multi-power world where the US interest in world-system management is declining. Substantially due to fracking (energy independence).
27. August 2019 at 19:12
“The real” mbka hare. The one who has been a commenter here since 2008, that is.
So we now there is some sad sap on this comment section impersonating me. I say, woof woof. No guts to use your own handle?
27. August 2019 at 19:25
Lorenzo,
the US has far more power than any other nations, especially power projecting globally, and this is why its actions annoy far more people right now than China’s, Russia’s or goodness, Venezuela’s, no matter how much you may disagree with them. China will eventually have the economic power that the US already has, to cajole others into line (lest they lose access to China), but right now the US has far more of that kind of power, because the US imports so much. Militarily, China stays close to shore, something the US manifestly does not. I mean, China cares about islands right in front of its shipping lanes, while the US is being righteously outraged about it… from the other end of the Pacific. Excuse me if I chuckle.
Importantly: Unlike the other nations you listed, the US is blackmailing otherwise unrelated parties in its endless disputes with the world, into siding with the US: extraterritorial laws, forced participation in its various sanctions etc. To their credit, neither China nor Russia do that sort of thing. Actually, no one else does.
The US cajoling used to be to the eventual benefit of the whole world (enforcing rules), so everyone else went along quietly. Now it appears to only benefit the US. Hence, the uproar.
28. August 2019 at 03:44
Scott
Unrelated to anything….just heard a comment on BBG and wondered how youwould reply….the collapse in US 30yrs is not a problem for FED/domestic economy it’s more of a reflection of global economy and /demand for $/search for yield. There’s a sense of malaise/defeatism that global cb’s should be more accepting of new environment/new new normal. Thanks
28. August 2019 at 03:47
The blog owner here, pretending to have visitors since 2008.
Woof woof
https://twitter.com/stillgray/status/1166519619667939328
28. August 2019 at 03:56
Now do you know why Trump put ‘I am the chosen one’ into the narrative when speaking about China at the helicopter presser?
https://twitter.com/Huawei/status/1164854946925121543
28. August 2019 at 06:15
Forget Trump, the Fed needs to listen to the bond market. 30-Year Treasury yields have fallen by 150 bps in less than 10 months.
28. August 2019 at 08:45
Does anyone know how or why it is possible for the 3 month yield to be higher than the 30 year yield? Why are these two corresponded to each other, like the 10 and 2 year yields?
28. August 2019 at 09:32
Dudley is a jackass, and if he believes what he says, he is also an idiot—-and that is putting it kindly.
Re: Trump—–He says everything he thinks at any point in time—-when he should wait a few weeks between statements—–he keeps losing like a delta hedger who trades 5 times a day who is short options. Having said that, he rarely actually does what he threatens to do—because, like the hedger, he always reverses himself.
And, by the way, he is pushing for the same interest rate policy as you and the markets—–so why shouldn’t he be annoyed at Powell?–you are. Oh, I forgot, he is “the President”—so he should not say what he thinks?
The conspiracy to get Trump is and has always been real—-and whether you hate him or not—one should despise those guys more, including McCain (he was the worst—always respected his military service—but he was a real mean and bitter man.)
I hope we are all around when Tin Lizzie gets a hold of the throne.
28. August 2019 at 09:41
What do you mean we are a “rogue” nation? Monetarily or some other way? Why quote Fischer? He asserts without examples—why do I think he and Netanyahu are not close buds?
28. August 2019 at 12:22
This blog wasn’t even around in 2008, you moron.
28. August 2019 at 12:47
I don’t get why the Fed would have to directly challenge Trump to remain apolitical.
All they have to say is that trade effects are largely real effects and they won’t be able to do anything about those. Just point to low inflation expectations and the inverted yield curve as market evidence for more policy accommodation and act accordingly.
28. August 2019 at 13:01
It seems again as if in Scott’s mind the US is a rogue state, but countries like China or Russia are not. Or the US is more a rogue than China. Of course, this is so bizarre.
28. August 2019 at 13:05
E Harding:
LOL, the other guy calling himself “the real mbka” is probably the blog owner who is drunk.
Everyone, we are witnessing the destruction of the “old guard” in real time.
https://twitter.com/jsolomonReports/status/1166803740822855684
Fake news is the enemy of the people.
28. August 2019 at 13:28
https://www.theguardian.com/world/2019/may/04/us-accuses-china-of-using-concentration-camps-uighur-muslim-minority
Here that sound?
Neither do I.
[CRICKETS]
28. August 2019 at 15:13
Dem Court Filing Reveals Trump Impeachment Probe Began BEFORE Mueller Submitted His Report, Contradicting Nadler’s, Pelosi’s Previous Claims.
THE D PARTY ATTEMPTED AN ILLEGAL COUP
28. August 2019 at 16:26
Answer to Derrick commenter above:
Mark Carney, governor of the Bank of England, has answered your question. He posited at Jackson Hole that long-term interest rates are set globally in globalized capital markets.
The Fed can artificially raise short-term rates inside the US through interest on excess reserves and other measures. But long-term rates are set globally.
Ben Bernanke has posited that global capital markets are flooded.
So the US operates in a world of globalized and flooded capital markets.
This raises some very touchy questions for monetarists. Can the Federal Reserve do anything to stimulate the domestic economy?
The two sidearms that the Fed has, interest rates and QE, are pop guns if the globalized capital markets are flooded.
I think this is why so many intrepid macroeconomists are now looking into the use of money financed fiscal programs. Larry Summers is talking more about deficit spending, but I think he is barking up the wrong tree.
David Beckworth is positing that the world is very hungry for safe assets and that means US dollars. Fine, let us give the world US dollars. Let us buy goods and services with French freshly printed US dollars.
28. August 2019 at 17:09
Wow, the trailer park is out in force on this thread again.
Harding,
this blog was created in response to the 2008 crisis. Ever heard of synecdoche? Probably not. But note taken that you can’t write a comment sans expletives.
In other news, it’s flattering that I have become so famous that even some 15 year old (incel?) apparently likes to use my handle now. Or it might just be the Russian agitprop and troll farm, what do you know. Anyhow as long as they post 2-liners quoting Twitter… no danger of being mistaken.
Christian List,
rogue nations tear up contracts they have signed with other nations, meddle in others’ internal affairs, send troops to fight wars in far away lands, promote regime change in unrelated countries, and pull out of international agreements they have undertaken. Quite objectively, these descriptions fit the US to a T, while China does none of the above.
28. August 2019 at 17:28
Ben, You said:
“The hysteria over the China trade tariffs in no way is matched by the scale of their importance.”
I’d put more weight on the stock market’s view of their importance.
As far as the Swiss and “free trade”, I’m afraid you don’t know what the term means.
Real mbka, Don’t worry, I have no trouble telling you apart. Your views and intelligence are about as far apart as possible. He’s probably George.
Cove77, I see the drop as partly reflecting global factors and partly reflecting a slowdown here.
Michael, You said:
Re: Trump—–He says everything he thinks at any point in time”
Wait, I thought we were told he is a master negotiator, a skilled poker player. You are saying he’s like a child?
You said:
“And, by the way, he is pushing for the same interest rate policy”
Interest rates are not policy, and Trump does not support the same monetary policy as I do. I favor steady NGDP growth of around 4%. And I do not favor a 100 basis point cut in rates.
Christian, You said:
“It seems again as if in Scott’s mind the US is a rogue state, but countries like China or Russia are not.”
It seems like you don’t know how to read. Instead of trying to infer what I think, why not try READING WHAT I ACTUALLY SAY.
28. August 2019 at 19:38
Ben, You said: “The hysteria over the China trade tariffs in no way is matched by the scale of their importance.” I’d put more weight on the stock market’s view of their importance.–Scott Sumner.
Maybe so.
The S&P 500 is up 13.4% year-to-date. That indicates the China trade tariffs are…what? Important? Unimportant?
Then, this from Forbes:
Aug 26, 2019, 10:42am
“S&P 500 Headed 15% Higher, If Analysts Got The Components Right”
Okay, there is always the retort, “Well, the S&P 500 would be a lot higher except from the Trump tariffs.”
Never reason from a price change, except when Wall Street changes it prices. I give up.
You know, arguing macroeconomics is like umpiring a baseball game played in a dense fog, with multiple and varying rule books at hand. The umpire with the megaphone is right.
28. August 2019 at 20:26
Trump is not stupid. He’s trying to cause a recession.
28. August 2019 at 21:23
Ben, You said:
The S&P 500 is up 13.4% year-to-date. That indicates the China trade tariffs are…what?”
That indicates that you are unfamiliar with the concept of “event studies”.
Elizabeth, You said:
“Trump is not stupid. . . . ”
I stopped reading at this point.
29. August 2019 at 05:12
This essay and responses was a interesting exercise. Scott began by quoting Dudley and emotions ran high, as Dudley “started the fire”.
Scott——I never said Trump was a master anything—-ever. I don’t like that he is non-stop tweeter—-but what I did say is if you don’t like what he said “today”, don’t worry he is likely to change it—-particularly when it’s bad—-he tosses around his own trial balloons, like cherry bombs.
Scott—-I have read enough of you to know that interest rates are not policy. I also know you were agitated at Powell for not dropping rates 50 more bps—-after he dropped them 25. So was Trump.
29. August 2019 at 05:34
mbka
What is with you and “Rogue” USA. I also don’t know why Scott suddenly brought that concept out of the bunker—-while in China no less. Rogue is a term designed to insult and has no content per say—-you gave your examples as to why US is rogue and China is not. You are a blind bat with bad radar.
29. August 2019 at 17:02
Michael, So you are denying that Trump favors a 100 basis point cut? If not, I don’t see your point.
30. August 2019 at 00:39
Michael Rulle,
US government officials have called other nations “rogue” whenever they didn’t want to respect some kind of international community standards. And as Scott quotes, even some US officials are saying that it’s rather the US now that is the problem, in international relations.
Is it justified to use the word “rogue” for the US? I’m not a native English speaker so I looked it up in the Cambridge Dictionary online. “Rogue: behaving in ways that are not expected or not normal, often in a way that causes damage” . Yep, it kinda does fit Trump Nation, doesn’t it? Is it insulting? Maybe, but the US government insults other nations’ people and governments all the time, latest was Denmark and its prime minister, but I lost count.
The US is causing real harm internationally now. It blackmails Mexico and Canada, actively destabilizes the EU, damages relationships with allied nations in Asia, and tries to destroy any kind of incipient international order. All this besides the trade war. It foments chaos not with its enemies, but amongst former allies. If you sit in the US maybe this doesn’t register to you, but from the outside, the US is a scary thing to watch and currently the #1 threat to world order – by its own admission may I say.
Why does the US believe it is somehow above any decency in international relations?
30. August 2019 at 04:20
Hi mbka—-sorry to resort to name calling—-really—-so I apologize.
But while I think the US is anything close to perfect, and can be more than nitpicked, resorting to a term we have historically used for nations who have verbally called for our destruction (and the destruction of Israel) is what I was objecting too—-and still do. Scott started the ball rolling——and you seemed to agree. If I believed we were Rogue, I would absolutely be seeking to take us down. My belief on these things is we live in a country where the people, generally, have a way of steering the ship in slow motion away from the bad and toward the good.
But some of your your terminology, is not applicable. We are not “blackmailing” Canada or Mexico—-regardless of what you think of our policies. Nor are we trying to destroy our relationships within “Asia”.
What you really seem to think is that Trump is Rogue, not America, or Trump makes us Rogue. So like many American born Americans you have unfortunately picked up the bad habits of much of our media and political commentariat——like Dudley for example—who started this post off—-which is “if Trump does something it’s the worst ever” —if I may exaggerate.
We are larger than the politics of the moment——many seem to not know that—-although I do notice many who come here from elsewhere do know that—-I wish you did too.
30. August 2019 at 04:35
Scott
I feel like I am in High School and became a “mean girl”. You just finished criticizing Dudley harshly——although in your usual utilitarian manner—-and then went to “Rogue” somehow. Then went jihad on Trump because of his dopey attacks—-meaningless as you should know by now—-on Powell.
So I pointed out you had the same view on FF rate—-which for me was irony. I don’t recall him calling for a 100bp cut—-I will take your word on it—-nor would it surprise me if he did.
But, I will go look it up—-but I would have sworn that after Powell cut 25, you then said he should “cut 50 now”. So it adds to 75. Maybe I simple read that later and conflated. Now I am likely wrong on that—-don’t think you would quibble over 25bps versus Trump—-on 50 yes, but not 75–:-)Did Trump have a timetable? Joking——
30. August 2019 at 05:29
Michael Rulle,
I believe what Scott was doing in his original post, and what I was doing just now, is to point out a certain asymmetry and hypocrisy in the international name calling. I know full well that the Iranian government, say, is a nasty one – to its own citizens. The US government, or Israel’s, are much nicer – to their own citizens. But frankly, Iran has killed a lot less people in foreign wars on foreign soils than the US, even if you count the Iran-Iraq war where they were attacked by Iraq with a more than wink-wink secret admiration from, and some say, active support by, the US. Another “rogue nation”, North Korea, has killed hardly anyone outside of their own country since the 50’s, even though they truly are as nasty as it gets to their own citizens. Incidentally, Trump has called for the destruction of both nations, but I suppose it doesn’t count when the US does it.
If you call Trump’s verbal antics dopey and meaningless, you’d have to do the same with the rhetorical blabber from Teheran. Do you really think Iran is honestly trying to destroy the US? Meanwhile: Mexico and Canada, were they somehow NOT blackmailed by the US recently, re: trade deals, immigration etc? Is Trump NOT undermining the EU? Trump is openly calling for the destruction of the EU by calling on countries to quit. You may not care for the EU, but I do. Some may not care for Israel, as you do. Either way, these are both calls for the destruction of another country. Once you match these statements 1:1 and be honest with yourself, you’d see that US rhetoric, and actions, are (sometimes) just as nasty as actions of the nations they call “rogue”. Only difference used to be, the end result of the US’ dirty wars used to be better in-summary outcomes for the planet because the targets were even dirtier than the means employed to attack them, and in balance it was the right thing to do. I’m not seeing this right now. I mean, which foreign wars has China fought recently? The US is upsetting the entire planet to punish China for building cheap and reliable hand phones.
Like it or not, Trump is your president now, and Trump for sure is rogue. Yes, he is giving the US a bad name, duh. He is giving the entire West a bad name. He has destroyed liberal democracy as an aspirational model in the world right now, because every authoritarian around can point to Trump and say, see, THIS is what you get with democracy, the worst coming to power. Surely, this has to be prevented from happening in our beloved [insert country]. Is he the worst ever, well not yet, but he’s the most damaging, destructive US president I have seen in my lifetime, a person that habitually insults everything I hold dear, chips at a world order that I liked, and undermines the only life I have, because I am a cosmopolitan and I can’t just go back to some kind of “my” country with their folk dance and national dish – there is no such place for me. My family is multi national and multi racial. Trump and his spiritual likes are a threat to me, legally, financially, physically. Because of Trump and assorted nationalists I feel like I’m a Jew in Germany in 1933: nothing really bad happening yet, but there is a foreboding.
And why does he do all that? Seems because he was bullied in high school or his dad beat him up, or something of that kind. Evil, yet pathetic.