The dangers of the policy of the Federal Reserve

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“I respect his independence,” said U.S. President Richard Nixon. “However, I hope that independently he will conclude that my views are those that should be followed.”

As a threat, it was not exactly subtle.

The year 1970, and Mr. Nixon had just been sworn Arthur Burns, chairman of the american central bank, the Federal Reserve. At the same time, he has been eyeing re-election in 1972.

Like those who have occupied the White House before him, Nixon knew what voters cared more about the economy.

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But he had a problem: while the us economy was still in its post-war boom period, there were signs that it might be a too fast growth, or “overheating”. Too much growth, too fast, often leads to high inflation, which pushes prices up for everything from household items to cars.

One way to contain inflation is the rise in interest rates, but this may slow down the spending and put a pinch on those who seek to obtain loans – this that Mr. Nixon wanted desperately to avoid in the months before the election day.

Enter Mr. Burns, the goggles economist chosen by the president to replace William Martin as chairman of the Fed. Mr. Nixon has made no secret of his belief that Mr Burns has to follow his directives, even if the head of the Fed is supposed to be free of all political influence.

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The president of the college, Mr Burns cut interest rates at a time when they should have been increased, leading to an economy of boom for the 1972 election.

If he allowed himself to get Nixon re-elected, that the boom and then transformed into a toxic combination of stagnant economic growth and high inflation – also known as “stagflation” – which has taken decades to bring under control. (Mr. Burns has also served under presidents Ford and Carter until he retired from the Fed in 1978.)Trump “brand”

The Nixon-Burns fiasco ushered in an era of relative independence of the Fed.

Although the head of the Fed, and the members of its executive committee – are appointed by the president of the united states and confirmed by the Congress, there has been a broad consensus that the bank’s interest rate decisions must be seen to be impartial.

But the financial crisis of 2008, and the extraordinary powers granted to the Fed and other central banks have begun to change this state of things.

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This is something that Donald Trump often dealt with in the course of his presidential campaign, when he was very critical of the Fed, saying that it was more political than his rival Hillary Clinton.

Once in office, breaking with tradition, Mr. Trump has decided not to renew President Obama’s nomination of Janet Yellen’s term at the head of the Fed.

Instead, he proposed the candidacy of the lawyer and former investment banker Jerome Powell, after expressly stating that he wanted a Republican in the head.
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Mr. Powell will be the first head of the u.s. central bank without a degree in economics in nearly three decades.

“We had two other lawyers who have been appointed to the chairmanship of the Fed, and the two have very little success,” said Burton Abrams, an economics professor at the University of Delaware.

Some have suggested that Mr. Powell’s non-academic background could lead a central bank that is more in touch with the needs of the private sector. But what has raised eyebrows beyond Mr. Powell’s background is the degree to which the President, Trump made sure it was known that Mr. Powell was his choice.

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“You want to make your own brand,” Mr. Trump said in November, in response to a question on why he did not intend to re-nominate Ms. Yellen.

This has led many people to wonder if the president, who has many farms that could benefit from the lower interest rates, could be angling to unduly influence the Fed.

“Donald Trump is rather unique – certainly, I do not remember of any other billionaire to become president, and he is a real estate developer, all highly involved in banking operations and interest rates and, therefore, there is a strong economic tie”, says Professor Abrams.’Alignment of stars’

But Donald Trump is certainly not the only one. In the wake of the financial crisis, central banks around the world – from the united KINGDOM, Japan – have become prime targets of politicians from all sides.

In Japan, the first iterations of the Abenomics have been seen by some, including Germany, the central bank head, as a violation of the independence of the central bank.

And a recent European study, economists have found that, for the first time, an important part of the thought that the independence of the central bank of the united KINGDOM and in the euro area would decline in the next four years.

This comes despite a body of academic research showing that when a country has an independent policy of the central bank, inflation tends to be more low and the prices are usually more predictable.

And in the united states, in addition to Mr. Powell, there are three other major open positions on the Federal Reserve, the council give Mr. Trump more capacity than any president in recent memory in the form of the u.s. central bank.

Mr. Powell has not yet taken office, and a political appointment as president does not necessarily mean a policy of the Fed, but according to Professor Abrams, “you can see the stars are aligning for a repeat [of Nixon-Burns]”.

And as the diaries of Arthur Burns, certify, standing up to the man in the Oval Office when it comes to the monetary policy task is not easy: “I knew that I was going to be accepted in the future only if I suppressed my will and yielded completely – even though it was evil to the law and morally-to his authority”.

Follow Kim Gittleson on Twitter @KGittleson, and Joe Miller @JoeMillerJr