- Tue, 02/14/2017 09:15 PM
With Yellen’s leadership and the state of the economy on the agenda, Federal Reserve Chair Janet L. Yellen is on the way to Capitol Hill today to deliver the Fed’s semiannual monetary policy report to Congress. She will be trying to ward off a hostile Republican Congress who is emboldened by Trump’s victory and eager to impose change on the Fed.
So far, the Fed has been shaped by the Obama administration and the global financial crisis. Its main monetary policy levers still have scars of the financial crisis with rates near zero and a balance sheet ballooned with trillions of financial assets. Even though a mix of inflation hawks and doves populates the decision-making Open Market Committee, Republicans cannot change anything with the Fed immediately. Yellen remains its chairperson till early 2018 and the Fed Board governors hold 14-year terms. Still, Trump has three board seats to fill and decide on replacing Yellen. Provided, Trump’s White House swiftly selects nominees and a Republican Senate confirms it, Trump and Republicans can recast the board’s monetary and regulatory perspectives within the year.
There are reasons for the Fed being in lawmakers’ crosshairs. Both parties have equally attacked the Fed since 1946. Republican interest grew in the Fed for the last decade amidst the financial crisis but the Democratic interest waned simultaneously, probably because President Obama had appointed the entire Board. Lawmakers have always blamed the Fed to avoid blame for a sour economy and especially around recessions or economic crises and always seek power that, counter intuitively, hand the Fed more power.
Republicans have aggressively criticized the Fed’s recent decisions. Due to the global financial crisis, the Fed with its dominance, created a useful foil which channeled the Republican anger about the weak economy and the Fed’s regulatory performance. Simultaneously, Congress and the president displayed fiscal theatrics. The GOP threatened to default on the debt and shut down the government, leaving the Fed responsible for engineering the recovery.
GOP critics are still not mollified after a decade since the crisis and the economy reaching the Fed’s congressionally chartered mandates for stable prices and maximum employment. Low rates, wages and growth continue to fuel GOP attacks. Republicans demand a more transparent Fed with a more invasive audit in its decisions. They also want the Fed to lose on discretion and have a more formulaic approach to setting monetary policy. In the face of a Republican attack, Democrats have always supported and defended the Fed’s unconventional policy choices, especially when blanket GOP opposition to additional fiscal policy made the Fed’s job even harder. However, today they have enhanced the Fed’s criticism and question the optics of paying banks interest on the reserves they hold at the central bank. They also complain of lack of diversity across the 12 regional reserve banks and call for greater transparency and better board oversight of hiring.
Several economic problems like income inequality, a job market failing to attract key cohorts into the labor force and persistently low productivity persist despite them not being issues for which Fed is not programmed to resolve. Bipartisan concern also prevails about the Fed’s willingness to aid Wall Street at the expense of lawmakers’ constituents on Main Street. In his early campaign period, Trump had praised Yellen for keeping rates low but by fall was accusing Yellen of playing politics with rates to help elect Hillary Clinton. Most presidents did not comment on monetary policy and always preferred it accommodative to help juice the economy come election time. However, Trump stands apart in accusing the Fed of keeping rates low to help Obama but reform seems unlikely in good economic times.