Fed’s Rosengren Warns of Perils of Political Interference

(Bloomberg) — Federal Reserve Bank of Boston President Eric Rosengren said the country’s last painful bout with high inflation was caused by White House meddling with monetary policy, a not-so-subtle warning about risks faced by the Fed amid pressure from President Donald Trump.

“The framework the Fed found itself in during the 1960s and 1970s raised doubts that the central bank could attain its goals, likely related to the concern that the Fed had not been as independent of short-run goals as it should have been, resulting in elevated inflation,” Rosengren said in the text of a speech on central bank independence he’s to deliver Friday.

Rosengren referred to historical work that revealed how the Fed bowed to pressure from the Nixon administration to support the expansion of fiscal policy during the Vietnam War. Inflation, as measured by the consumer price index, eventually shot as high as 15% in 1980. Unemployment rose to almost 11% in 1982 when the Fed, under Chairman Paul Volcker, finally moved aggressively to smother inflation.

Trump has been pushing the Fed for a full year to pursue a looser policy path in order to stimulate faster growth. Policy makers, behind Fed Chairman Jerome Powell, raised rates four times in 2018 before pausing the tightening cycle as Trump’s trade disputes helped darken the outlook for global growth. With risks seen as continuing to rise and inflation below target, the Fed has signaled it will likely cut rates at its July 30-31 meeting.

In his latest attack, Trump on Friday tweeted that “because of the faulty thought process we have going for us at the Federal Reserve, we pay much higher interest rates than countries that are no match for us economically.”

The Boston Fed chief emphasized the independence required for sound monetary policy is “tactical” and doesn’t allow bank officials to set their own goals. Congress has given the Fed a so-called dual mandate to pursue stable prices and maximum sustainable employment.

“Central bank independence is not about deciding what to pursue but rather allowing the central bank to determine how best to pursue it, while holding the central bank accountable for as much,” he told a central bank research conference in New York.