The normally stodgy Federal Reserve interest-rate-setting committee meeting kicks off Tuesday with more drama than a daytime soap opera, and it’s making more Americans wonder about the need for an all-powerful central bank.
Multiple storylines threaten to overshadow the announcement Wednesday of a hotly anticipated cut to interest rates.
• Mixed economic data has created a rift among the Fed’s board that has spilled out into the public for the first time in 40 years.
• Embattled Fed Governor Lisa Cook plans to attend the meeting despite President Trump’s efforts to remove her, and top White House economic aide Stephen Miran, who does not have a board seat, is also expected to be there.
• Mr. Trump’s relentless push for a rate increase has backed the Fed into a corner. Kowtowing to the president’s demand for a “big rate cut” will raise questions about its independence, but bucking his calls will make it look partisan.
• The intense political pressure includes Mr. Trump’s near-daily insults calling Fed Chairman Jerome Powell a “numbskull,” “fool” and “moron.”
• The feuding between Mr. Trump and Mr. Powell about the Fed’s renovation of its Washington headquarters remains unresolved.
The histrionics have left Americans fed up with the Federal Reserve. A Pew Research Poll last year found that the Federal Reserve had one of the lowest favorable ratings among 20 government entities. The Fed had a net favorability rating of +13, placing it ahead of only the CIA, Department of Education and IRS and far behind the U.S. Postal Service, Centers for Disease Control and Prevention, Department of Homeland Security and most other agencies.
A YouGov poll released this month shows mixed results for whether Americans trust the Fed to boost the economy, keep the U.S. out of a recession or be politically independent. For example, 52% of Americans said they trust the Fed “a lot or a little” to keep the country out of a recession, compared with 48% who don’t trust the Fed or are unsure.
The public’s skepticism of the central bank has again raised questions about whether or not it should be abolished. This year, Republican lawmakers introduced bills in the House and Senate to eliminate the Fed, the first time such a measure has been proposed since 2013.
Some economists argue that an economy without the Fed would be preferable but also unrealistic, given how much U.S. monetary policy has become entwined with the central bank since its formation in 1913. Abolishing the central bank would increase economic volatility and possibly reduce the dollar’s international standing because the Fed manages America’s money supply.
“The way the world currently exists is that the Fed is in charge of supplying the U.S. dollar, so ending the Fed means you’re ending the U.S. dollar,” said Jai Kedia, a research fellow at the libertarian Cato Institute. “Any plan that requires ending the Fed would require a serious, very careful deliberation on what to do with the dollar.”
Economists say a better path than outright eliminating the Fed would be changes on the margins to help the central bank stay on course or at least reduce political interference.
One such tweak would be to adopt one of two existing economic rules for setting monetary policy.
The first rule, known as the Taylor Rule, would mandate the Fed to raise interest rates when inflation is above the 2% target and lower them when inflation falls below the 2% target. A second rule, the Nominal GDP rule, would require the Fed to lower or raise interest rates depending on whether the gross domestic product is above or below the target rate.
Economists agree that adopting one rule and sticking to it would make the Fed more predictable and the economy more stable. A rule would also make it harder for presidents to interfere with the central bank’s decisions.
Mr. Trump may be among the Fed’s fiercest critics, but he is not the first president to go to war with a Federal Reserve chair. Presidents Truman and Lyndon B. Johnson also put significant pressure on the central bank to follow their political whims.
“Making the Fed follow a rule gives them a powerful safeguard that will move them more on the independent side of the spectrum,” said Ryan Young, senior economist at the Competitive Enterprise Institute. He added that Congress would then oversee whether the Fed follows the rule.
Some economists argue for eliminating the Fed’s dual mandate of keeping inflation low while keeping employment at the highest level the economy can sustain: two mandates in direct opposition to each other. Cutting interest rates has helped the labor market but also increased inflation because more money is available to chase goods and services.
“Whatever they do, there is always a trade-off. So just have the Fed stick to inflation, which they can do, and let other policy levers, or better, the free market, handle the labor market,” Mr. Young said.
Although Mr. Trump has unleashed a torrent of criticism against the Fed and Mr. Powell, he has not called for its elimination. He recently nominated E.J. Antoni, who has long advocated for abolishing the Fed, to head the Bureau of Labor Statistics.
Rep. Thomas Massie of Kentucky and Sen. Mike Lee of Utah, both Republicans, introduced bills this year calling for eliminating the Fed.
The bills, titled the Federal Reserve Board Abolition Act, would abolish the board of governors and the 12 Federal Reserve banks and repeal the Federal Reserve Act, which created the system.
“The Federal Reserve has not only failed to achieve its mandate, it has become an economic manipulator, directly contributing to the financial instability many Americans face today,” Mr. Lee said in a statement. “We need to protect our economic future, end the monetization of federal debt that fuels unchecked federal spending, and put American money on solid ground. We need to end the Fed.”
Sen. Rand Paul, Kentucky Republican, introduced legislation to end the Fed in 2013.
Amid all the drama, the U.S. economy is showing mixed signals. Hiring has slowed sharply, and inflation has cooled but remains above targets. That puts the Fed in the conundrum of whether to cut rates and promote hiring or hold off and risk allowing inflation to intensify.
Mr. Powell has signaled that the Fed will find a middle ground, suggesting a quarter-percent rate cut. Federal funds rates are now set at 4.25% to 4.5%.
When the Fed lowers interest rates, borrowing money becomes cheaper and consumers pay lower interest rates on credit card debt and automobile loans. However, it also lowers the interest earned on savings.
