Biden is returning to political norms on Fed decisions

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Dan Primack
·1 min read
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The modern Fed is designed to operate free of political pressures, as codified in a 1951 agreement with the U.S. Treasury Department. That gives monetary policy to the Fed and fiscal policy to Treasury.

Reality check: The president nominates Fed chairs and governors, who don't have lifetime appointments like Supreme Court justices, so politics has always maintained some influence.

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What's changed: Former President Trump regularly blistered the Fed and Chairman Jay Powell, who was picked by Trump himself. It was unprecedented and raised concerns that Fed politicization would become the new norm.

  • Powell publicly brushed off Trump's attacks, but Fed monetary policy did become more Trumpian (i.e., looser), particularly in response to the pandemic.

  • As for determining cause and effect, we might need to wait for Powell's memoir.

President Biden appears to be honoring pre-Trump etiquette by not publicly commenting on Fed decisions.

  • That means any monetary politicking will be done in backrooms, likely by Treasury Secretary Janet Yellen, who was Powell's predecessor at the Fed.

  • Presidents usually prefer that the Fed keep interest rates low. So long as Powell remains on his current path, don't expect tensions to bubble beneath the surface. But it bears watching if monetary policy tightens, in an effort to preempt inflation.

The bottom line: Trump may have overtly politicized the Fed. But it was only temporary.

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