Politics and the Fed

I do not share the view that the Fed is above politics.  The Fed was created by politicians.  They appoint/approve many of its governors.  They set the rules for what the Fed is authorized to do, whether the Fed follows that or not.  The politicians can change the rules if they want.

Beyond that, there is the formal and informal lobbying from businessmen, bankers, and speculators, who might implicitly argue for preservation of purchasing power, or stimulation of the economy.

There is also the interaction of the Fed with the Department of the Treasury.   So, from all of this, I view the Fed as an implicitly political institution, which is why my analyses of the Fed stem largely from the economics of the situation, but do not end there.  I engage in “game theory” analyses of prospective Fed actions, asking myself how different scenarios would be received politically.  The Fed lives to protect itself.

So, when I read articles that suggest an apolitical Fed, I come to two possible conclusions:

  • The truth is being stretched, and what you hear serves a political goal, or,
  • The Fed governor speaking does not care about reappointment.

Politics abhors idealists, outside of semi-revolutionary moments.  Being the art of the possible, politics favors compromisers.  As I see it here, the Fed is under a lot of political pressure to stimulate the economy, and not under a lot of pressure to restrain inflation.  Should it surprise us if the Fed continues to loosen, perhaps aggressively?