Last October, I wrote that, “…the Fed is far from the invulnerable fortress many believe. This is a time of unique political vulnerability for the Federal Reserve, no matter how hard it tries to dismiss nay-sayers up to and including the President.” Well, yes…for all the Fed has done intentionally or not to assuage the President, he’s still steaming mad. Last fall, I pointed to the President’s appointment power as one way he could wreak vengeance; now, he has.
Importantly, the President has tweeted his intention to nominate Mr. Moore, but no paperwork has been sent to the Senate. I’ve seen enough slips between announcement and appointment to be wary even when a nominee has as much support as Mr. Moore across the Administration. Mr. Trump yesterday said he would nominate Mr. Cain, but again paperwork will take a while and doubtless pose some problems. One learns in this town to believe nothing until it happens. Still, there are rarely two Fed nominees so divorced from the conventional model of distinguished macroeconomists and stolid business leaders that usually take their seats in the Board’s awe-inspiring chambers. What would happen if one or both were confirmed?
First, it wouldn’t be the end of monetary policy as macroeconomists and markets know it. Many have speculated that Mr. Moore would become the chairman of the Fed at the end of Mr. Powell’s term in 2022. This, though, presumes that Mr. Trump wins re-election, that the Senate stays in GOP hands, and that Mr. Trump hasn’t somehow soured on Steve Moore by 2022.
And, even if Mr. Moore or Mr. Cain took the top of the table, the Fed chair doesn’t make monetary policy – the FOMC does – nor does he or she set regulatory policy – the Board does. The chair is of course disproportionately influential in all of these deliberations, but I think I can guarantee without any fear that any Fed chair who sought to reintroduce the gold standard or set policy on broader commodity prices would get nowhere. The same goes for any Fed chair who tried to eviscerate most of current bank regulation – the law establishes much of it and, beyond that, there’s a lot of institutional memory around the central bank dating back to 2008. Assuming the chairman could find something that guts the rules that’s permitted by the law, Gov. Brainard would likely have enough colleagues to block any such rule by as much as a 5-2 vote. For all critics now think the Powell Fed is gutting Dodd-Frank, changes are relatively minor in comparison to what the rules looked like in 2007. Deregulation is a very different matter.
Further and even more fundamentally, the Fed is not just the Board, it’s a System, and as a System it’s one in which other voices matter and at which the staff often counts as management. Years ago, a Fed chair asked me if I would like to have my name submitted to the President as a Fed nominee. A very senior Fed Staffer I knew well then called me to urge that I accept the offer. I told him that I was reluctant because in my company, the staff work for me; at the Fed, I said, I’d work for him. The staffer laughed and laughed, finally sputtering that it usually takes Fed governors six months to figure this out, after which they content themselves with signing things and flying to nice places.
Of course, this might well be true of most Fed governors and not of Messrs. Moore or Cain, each of whom is surely energetic and doubtless convinced of his views. For them, there is another fate to which the Fed staff and the current chair can consign them: running one of the Fed’s responsibilities that keeps troublesome or inexperience governors out of the way. One of these assignments puts a governor in charge of Reserve Bank operations – think nonstop trips to twelve districts and much midnight reading of Reserve Bank budgets. Another is the payment system – right now, this is a hot topic, but it’s also a hard topic and sure to keep a possible dissenting governor tied up in enough knots at least to slow him down.
Does this mean that the Fed is impregnable to Presidential influence and resolute against officials who transgress institutional norms? Of course not. Messrs. Moore and Cain would have seats at a very important table and make their views not only known, but also heard. On some issues, they might even be decisive. But, the real risk to the Fed comes not from any unconventional new governors – it comes from within. The Fed is as vulnerable as the President’s political expediency chooses to make it because post-crisis policy hasn’t worked. For all the Fed touts its successes, the recovery was weak, fragile, and unequal. For all the Fed touts financial stability, it’s only banks that are better, not the financial system. No wonder Mr. Trump thinks he can make it his own.