Is the Fed Playing Politics?

CAMBRIDGE – In his recent debate with his opponent Hillary Clinton, Republican presidential candidate Donald Trump pressed his claim that US Federal Reserve Chair Janet Yellen is politically motivated. The Fed, Trump claims, is applying overdoses of monetary stimulus to hypnotize voters into believing that economic recovery is underway.

It’s not a completely crazy idea, but I just don’t see it. If Yellen is so determined to keep interest rates in a deep freeze, why has she been trying in recent months to talk up longer-term rates by insisting that the Fed is likely to hike rates faster than the market currently believes?

Central bankers have of course been known to help incumbents before elections, by allowing inflation to drift up and keep employment booming. During US President Richard Nixon’s 1972 re-election campaign, he sternly lectured Fed chair Arthur Burns on the need for pump-priming the economy to help him defeat his Democratic challenger, George McGovern. Nixon won resoundingly, but Burns’ policies helped set off the worldwide inflation of the 1970s and brought forward the breakup of the post-war system of fixed exchange rates. The long-term effects were catastrophic.

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© Project Syndicate