Fed’s 2018 Transcripts Show Desire to Shore Up Political Support

Catarina Saraiva and Alexandra Harris
·3 min read
1

(Bloomberg) -- Federal Reserve officials recognized the growing need to get political and public support for their actions — particularly in times of crisis — well before the pandemic shuttered the economy, transcripts from the central bank’s 2018 meetings showed Friday.

Most Read from Bloomberg

“Federal Reserve independence is critical, but there’s no doubt that we’re going to need political support for our actions in the next downturn, particularly if it involves using the balance sheet,” Robert Kaplan, then-president of the Dallas Fed, said according to transcripts of the Federal Open Market Committee meetings in 2018.

“So I think the work that’s being done by presidents, governors, and the chair to build our relationships on the Hill now, well in advance of a crisis — those efforts are essential,” he said.

While not directly related to then-President Donald Trump’s criticism of the Fed throughout the year, the transcripts indicate policymakers recognized the effectiveness of their response could ultimately be circumscribed by elected officials.

Read More: Fed Publishes Transcripts for 2018, a Year of Political Pressure

Policymakers had lifted the benchmark lending rate from near zero, but interest rates were expected to remain low for quite some time due to structural shifts in the US economy. That would limit the central bank’s firepower in future downturns, necessitating an increased reliance on bond purchases and other unconventional measures like those used in 2008 and the years that followed.

“The use of asset purchases may face some limits in the future,” said Cleveland Fed President Loretta Mester. “Our choice of operating procedure will determine the normal size of our balance sheet. If the balance sheet grows too large, we may run into constraints, both political and operational, in using this tool.”

Policymakers also expressed concerns about the perception of holding an abundance of bank reserves while paying interest on that cash parked at the Fed. At the time of the November 2018 discussion, banks could earn about 2.2% just by stashing funds at the central bank.

Participants wanted to avoid the perception that interest payments on reserves would be a subsidy to large banks, and even worried about how controversial they would appear as interest rates climbed. They even went so far as to discuss a quota system that limited the interest paid on reserves, similar to regimes employed by the Norges Bank and Reserve Bank of New Zealand.

“Everything in the transcripts associated with the balance sheet is marinating in politics,” said Mark Spindel, chief investment officer at Potomac River Capital. “How it looks, how it will be received, what they can get away with.”

Concerns about the size of the balance sheet, interest payments to banks and reserves are relevant again today, as policymakers continue to shrink their portfolio after expanding it rapidly to cushion the economy during the pandemic. This time, interest rates are at their highest level in more than two decades.

Presidential Pushback

The discussions around potential political frictions were happening at a time when the Fed was facing heavy criticism from Trump over its interest-rate increases. Policymakers lifted the fed funds rate four times that year to a range of 2.25% to 2.5%.

Though Fed officials refrained from directly mentioning the president’s criticism, often levied via Twitter, they emphasized the need for the Fed to remain steadfast in the face of outside pressure.

“Most important in my mind is the need to maintain the courage of your convictions; to try to anticipate rather than react; to make choices affirmatively when needed — which means acting rather than waiting; and to be willing, regardless of the short-term political consequences, to do what’s in the nation’s long-term interest,” Bill Dudley said at his last meeting as New York Fed president.

The Fed publishes transcripts for each year’s meetings on a five-year delay.

--With assistance from Craig Torres.

Most Read from Bloomberg Businessweek

©2024 Bloomberg L.P.