Independence Day is Late This Year

?

Remember all the talk earlier in the year that the Fed could not cut rates close to the election? By some accounts there is a blackout period in the second half of the year. Some argued the blackout period starts when the conventions kick off the serious part of the campaign. After that, any move would be viewed as politically motivated, hence better for the Fed to hunker down.

?

In the past week former President Trump upped the ante. In an interview with Bloomberg, he attempted to preempt a rate cut ahead of the November elections, saying “It’s something that they know they shouldn’t be doing,. He also (almost) dropped his plan to fire Powell, saying Powell should serve out the rest of his term “especially if I thought he was doing the right thing.”

?

Two wrongs don’t make a right

My view remains that the timing of the election is having virtually no impact on the Fed’s actual policy path. This idea of a blackout period makes no sense. No matter what the Fed does extremists on one side of the aisle or the other will attack them. Moreover, the economy does not stand still for the election. Hence if they don’t cut because of the blackout rule then they can be justifiably criticized for letting political considerations drive policy. The longer the blackout period, the bigger the risk of making a policy mistake and damaging their reputation.

?

The answer is for the Fed to be as transparent as possible about what will trigger a cut. Indeed, this is one of the underappreciated benefits of the Fed’s Summary of Economic Projections. It shows the range of views on the Committee and the median projection offers a reasonable roadmap to how growth and inflation trends will drive appropriate monetary policy. Currently members are predicting between one and three cuts this year assuming some moderation in growth and inflation. “Handcuffing” policy to economic fundamentals makes it easier to do the right thing. Indeed, this argues for improving the SEP by explicitly tying together individual forecasts and offering more commentary on the underlying assumptions behind the view.

?

If the data continue to support a cut—and that is not a done deal—then the Fed can demonstrate how an independent central bank sets aside political considerations and follows fundamentals. However, regardless of what the Fed does, it still faces an existential risk of losing its independence. My main concern is the appointment process for Governors. In his first term, Trump proposed a mixed bag of governors. The Senate then sorted through the list, approving the strong candidates (such as Powell's promotion to Chair) and rejecting the weak ones (such as Judy Shelton). For the Fed as an institution is not just about Trump vs Harris but also about a Senate that supports an independent technocratic Fed.