By Michael S. Derby and Howard Schneider
Jan 13 (Reuters) – Even as President Donald Trump has laid out clear markers as to what he expects for his upcoming selection as Federal Reserve chair, some current central bankers remain confident that whoever gets the job will stick to the Fed’s mission in part as the weight of responsibility becomes clear to the new leader.
“My sincere hope” is that whoever the president picks to succeed Jerome Powell when his term ends in May will understand the central bank’s official mission of low inflation and maximum job growth as laid out by Congress, Federal Reserve Bank of New York President John Williams told reporters Monday.
Williams said he’s confident that whoever gets tapped for the job will understand the stakes of their role and the consequences of failure. He added his long tenure at the central bank gives him hope any incoming leader will rise to the mission.
“The one constant in my experience of the Fed is that once you walk in these doors, you understand that we have a very, very important responsibility to the American people,” Williams said. “When we don’t get it right, it matters a lot. When we get it right, it matters a lot, and my hope would be that anyone who comes into that role would come in with that understanding, and do their very best” to uphold the mission set out by Congress.
Speaking on Tuesday on an MNI webcast, St. Louis Fed President Alberto Musalem offered a similar view. “I expect the new chair to be very committed to the dual mandate of maximum employment and price stability,” the official said.
“All of my colleagues and I are committed to setting monetary policy, the best monetary policy for the economy at a particular time and for all Americans,” Musalem said, adding “I don’t expect that commitment to change, regardless of who is the chair.” He also said when it comes to setting policy, “I expect the reaction function to be maintained, and I expect it to be communicated very effectively to the public.”
UNDER ATTACK
The confidence expressed by the two men comes as the Fed is under unprecedented attack from the president on multiple fronts. Since returning to office a year ago, Trump has repeatedly blasted Powell and tried to command the Fed to cut rates very aggressively even as inflation has been well above the 2% target and his trade policies have worsened price pressures.
Trump has also repeatedly threatened to fire Powell for a range of reasons and has also explicitly stated that whoever he selects to take over for the current Fed leader will cut interest rates aggressively.
Trump’s assault on the Fed ramped up considerably on Sunday with the revelation that his Department of Justice had issued grand jury subpoenas to the Fed and officials related to a central bank renovation process of the Fed’s headquarters. That caused Powell to fire back at the president, with the Fed leader arguing the legal developments were really about the Fed not taking monetary policy orders from the president.
“The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the President,” Powell said in a statement Sunday.
He added the stakes of the showdown are clear: “This is about whether the Fed will be able to continue to set interest rates based on evidence and economic conditions—or whether instead monetary policy will be directed by political pressure or intimidation.”
The short-list of potential Powell successors includes current Fed Governor Christopher Waller, as well as White House economic advisor Kevin Hassett and former Fed Governor Kevin Warsh, along with BlackRock Inc’s chief bond investment manager Rick Rieder.
Hassett and Warsh candidacies have caused concern among market participants based on their comments on inflation and other central bank issues. Many worry that either of the two men would subordinate Fed policy to the dictates of a White House that already wants a monetary policy stance not consistent with the data.
Current Fed officials and a wide range of market participants agree an independent central bank, which insulates the institution from short-term political considerations and allows it to make difficult and potentially unpopular monetary policy choices, remains of utmost importance.
Williams told a Council on Foreign Relations gathering that when central bank independence is compromised by political attacks, history shows that “often leads to very unfortunate economic outcomes with economic disability and high inflation.”
Musalem echoed Williams’ comments on the importance of central bank independence and said he’s not worried about the current slate of candidates to take over for Powell. “The candidates are highly qualified,” the official said.
(Reporting by Michael S. Derby, Editing by Nick Zieminski)
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