Former New York Fed President Bill Dudley said Monday that the Federal Reserve’s independence is not at risk, as the COVID-19 crisis forced the Fed and the White House to collaborate on engineering the economic recovery.
“I don’t see a conflict of what the Fed wants and what the administration and Congress want,” Dudley said at the Yahoo Finance All Markets Summit on Monday. “[They want] the same thing: to stimulate an economic recovery.”
Although the Federal Reserve’s Board of Governors are appointed by the president, the central bank itself is not an executive agency and was designed to have autonomy when setting its monetary policy.
Dudley in August of last year penned a controversial op-ed suggesting that the Federal Reserve turn its cheek to helping the economy to damage Trump’s shot at re-election.
At the time, the Fed began lowering interest rates to soften the blow of President Donald Trump’s tariff war with China. Trump called on the Fed to more aggressively lower rates, coinciding with several tweets lashing out at his own Fed Chairman Jay Powell.
Weeks after, Dudley took to the pages of Bloomberg Opinion to argue that the rate cuts risked “bail[ing] out an administration that keeps making bad choices on trade policy.” His suggestion: refuse to cut interest rates and bear the responsibility of a sour economy on Trump, “including the risk of losing the next election.”
The backlash arrived shortly thereafter, with one GOP senator calling for a probe. The Fed itself immediately rejected Dudley’s suggestion, issuing a rare press statement clarifying that “political considerations play absolutely no role” in its policies.
Asked if he had any regrets about writing that op-ed, Dudley defended the piece as a “thought experiment” and said he was not suggesting the Fed tank the economy to stop Trump’s re-election chances.
“I wasn’t saying that the Federal Reserve should behave in a way that somehow would affect the election outcome that would be totally inappropriate,” Dudley said. “The Fed needs to set monetary policy based on its mandated objectives and I believed that then and I believe that now.”
Dudley said the COVID-19 situation has required the Fed to work closely with the U.S. Treasury in supporting the economy. As of late, the Fed has been applying its own pressure on the White House and Congress to pass targeted fiscal support to businesses and households as the recovery appears to lose some steam.
Dudley told Yahoo Finance he is worried that leaning further on the Fed will yield little, with the central bank’s tools “rapidly diminishing” in power.
“It would be problematic for the Fed if they didn’t say anything, because the Fed would be somehow implying that they can take care of the problem when they can’t,” Dudley said.
Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.