Sunday, February 5, 2023
Feb. 5, 2023

Linkedin Pinterest

The Week Ahead: Why keeping politics out of the inflation fight matters

By
Published:

“Just kick ‘em in the rump a little,” the president told the chairman of the Federal Reserve four days before the central bank’s interest rate setting committee was to meet. The American economy was limping along, federal spending was a growing concern, and a war was raging halfway around the world.

It was late 1971, and President Richard Nixon was on the phone with Fed Chairman Arthur Burns. Burns was telling the president the Federal Open Market Committee was set to cut a key interest rate in the effort to ignite the economy. Nixon wanted Burns to send a clear message that the committee needed to act aggressively to ease monetary policy. The 1972 presidential election was 11 months away.

It would take a decade, marked by demoralizing inflation and sharply higher unemployment, before the Federal Reserve began to forge its reputation as an institution independent of politics.

Fifty years on, the Fed’s reputation has been tarnished not by naked political ambition by a ruthless and deceitful president but rather by its own misjudgments on monetary policy. And addressing those misjudgments has an unmistakably political cost.

Keep all this in mind in the week ahead as the Fed holds another interest rate meeting and Americans continue early voting in the midterm elections. The defining issue of both will be inflation.

The investment markets are convinced the bank will continue the pace of increasing interest rates by hiking its key borrowing rate by another three-quarters of a percentage point. Doing so a week before an election is an important indication of the Fed’s independence from political influences, in contrast to 50 years ago. The agency is expected to signal its patience by backing off that pace in the months ahead. That anticipation has helped stock prices gain a footing in the past two weeks.

Voters may not be so patient to experience the effects of efforts to fight inflation. Republicans are favored to regain slim control of the House, while the majority in the Senate may continue to rest on the tie-breaking vote of the vice president. Each party blames the other for today’s inflation with little serious talk about how to address it meaningfully because those decisions are much harder to make for politicians.

For Congress, tackling inflation means slowing the growth of government spending. Making choices about what to spend less on will be difficult with a divided government and a divisive election looming in two years. For the central bank, fighting inflation means higher interest rates and risking a recession.

Investors should be watchful for efforts to weaponize monetary policy for political gains. It’s a question of economic credibility.


Tom Hudson is a financial journalist and chief content officer at WAMU public radio in Washington, D.C. Follow him on Twitter @HudsonsView.

Loading...