In an interview with CNBC this week, Donald Trump accused Janet Yellen and the Federal Reserve of artificially keeping interest rates low to help the Obama administration’s image.
Trump said, “She’s [Yellen] obviously political and doing what Obama wants her to do, and I know that’s not supposed to be the way it is.”
Trump argued that by keeping interest rates “artificially low,” the Federal Reserve is propping up the stock market for the explicit reason of making the current administration look good upon its departure.
He also suggested that the Fed was simultaneously attempting to leave the next administration with no other decision than to raise rates, effectively lowering the stock market and staining that administration’s reputation.
You can hear exactly what Trump said for yourself here.
Trump has already received quite a bit of criticism over these comments. But the truth is, he’s right about some things, wrong about others, and right for the wrong reasons about most of it.
The bottom line is that the Federal Reserve simply doesn’t answer to the President. It answers to Congress.
The Federal Reserve isn’t even a government organization. It’s essentially a trade organization for the nation’s banking industry that’s heavily regulated by Congress.
The Fed has simply kept the Federal Funds and Discount Rates historically low (though not “artificially,” as they directly set them) to compete with other central banks.
Trump is right that these historically low interest rates have affected the nation’s savers. But it has nothing to do with Obama specifically. (He also fails to mention that the country’s savings rate has been critically low for decades.)
The Federal Reserve really wants to work with whatever administration is in office, Democrat or Republican, to do whatever it can to help boost the economy. And that’s simply because the interests of its member banks are aligned with the nation’s economy overall more than it is with politics.
Trump is simply trying to connect with voters. And although he’s over-generalizing the facts here, I personally don’t think it’s necessarily a bad thing.
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The truth is, the American public has been confused or apathetic about the Federal Reserve for decades. And I believe that any and all investigation into the Federal Reserve’s actions is always warranted.
That’s not because I believe the Fed is some kind of evil operation. But it’s critically important that, if we’re going to use the Federal Reserve’s product (the U.S. dollar) to store our wealth and labor, we need to be vigilant in monitoring its actions and demanding that our representatives in Congress take action when needed.
Congress actually has more power over the Federal Reserve than most people even know.
Following Executive Order 6102 in 1933, which required all Americans to exchange gold bullion for paper money with the Federal Reserve, there were a series of actions brought before the Supreme Court of the United States in contest. These are known as the “Gold Clause Cases.”
In the case of Norman v. Baltimore & Ohio Railroad Co. 294 U.S. 240 (1935), the Supreme Court upheld:
There is no constitutional ground for denying to the Congress the power expressly to prohibit and invalidate contracts although previously made, and valid when made, when they interfere with the carrying out of the policy it is free to adopt.
This kind of ruling essentially sets Congress for doing whatever it wants in terms of adopting its own monetary policy independent of the Federal Reserve’s — as long as it’s legal.
So there’s no reason we can’t (or shouldn’t) demand more from our representatives to take action when the Federal Reserve‘s policies give a favorable bias to its member banks over the American public. Or, if representatives are unwilling to take action against any bias policies, they can be replaced.
Until next time,
Luke Burgess
Energy and Capital
