Summary of Roger Lowenstein's article "1971 and the Undermining of Fed Independence"
Roger Lowenstein is a financial journalist and author. He reported for the Wall St. Journal for more than a decade and is probably most well-known for writing the bestselling books Buffett: The Making of an American Capitalist and When Genius Failed.
He recently wrote an article in the summer 2021 issue of International Economy.
It’s a short read that discusses the independence of the Fed and how presidents can compromise that independence at times.
The role of the Fed’s independence has gone back and forth for many decades.
Sometimes the president tries to use the Fed for their own agenda, such as trying to get reelected, and sometimes they just let the Fed independently try to carry out their role of keeping a stable dollar and maintaining low unemployment.
Here are some examples, according to Roger Lowenstein, of when the president tried to compromise the Fed’s independence for their own agenda:
Lyndon Johnson to fund his war on poverty and the Vietnam war.
Richard Nixon to assure his reelection, which Roger says worsened the serious inflation of the 1970’s. (In August of 1971, Richard Nixon delinked the dollar from gold which contributed to inflation as well)
After Nixon, according to Roger, there weren’t any instances of the president strong arming the Fed with one exception – Donald Trump.
Now, instead of strong arming, “soft suasion” is used instead. This is where the president uses a crisis as a way to create a sense of a shared mission between the president’s administration and the Fed.
The pandemic is currently receding and the economy is growing strong. The Fed estimates that it will grow at 7% for the year and the U.S. is adding 500,000 jobs per month. Despite this, the Fed is still monetizing Treasuries and keeping interest rates artificially low.
Jerome Powell has showed a lot of appreciation for Biden’s New Deal. He also expanded the Fed’s balance sheet which has been financing it.
As per Roger Lowenstein, here is how he sums up the U.S.’s current situation:
“Fed Chair Jerome Powell is essentially using the playbook from the Ben Bernanke-Janet Yellen years – invisibly low interest rates and massive bond purchases. Yet this crisis is palpably different. The mortgage bubble had its origins in finance, and the bank sector was so damaged that a decade of Fed stimulus barely budged the inflation rate. From 2010-2019, annual money [M2] growth remained under 6%. The recent economic crisis was caused by a bug. The vaccine for the bug inoculated the economy, such that the Fed’s medicine delivered dramatically different results. Now we have 26% money growth (in the year to February 2021), and further growth this year. More money means inflation and that is what we got.”