Congress wrote the Federal Reserve Act to insulate our nation’s monetary policy from political pressure. But it is impossible to do that perfectly. Inevitably, political forces occasionally influence how Fed leaders make policy. And there are at least a few instances in which Fed policies influenced elections, whether intended or not.
The large number of reader questions in response to recent news about the Fed indicates that people want to understand these interactions better. So here is a review of some history.
The Fed is legally charged with maintaining stable prices and high employment. When there is no inflation and unemployment is low, voters tend to be content. That usually favors incumbents in elections. Yet, no challenger would think of faulting the Fed for this. The problem comes when either inflation or unemployment is high, or when the Fed faces difficult tradeoffs between the two. Then losers may attribute their losses to the Fed.
That was the case when Bill Clinton narrowly edged George H.W. Bush out of a second term in 1992. The economy had been in a recession from mid-1990 into early 1991. Clinton made the soft economy an issue and won. Bush blamed Fed Chairman Alan Greenspan with the notable phrase, “I reappointed him and he disappointed me.”
Bush had a point, in that monetary policy was very tight in the six quarters before the 1992 election, if one looks at growth of the money supply compared to that of real output. But if you instead look at the Fed’s interest rate target, which dropped from 7 percent in January 1991 to 3 percent in September 1992, it seems the Greenspan Fed was easing credit conditions appropriately, even if belatedly, in response to a soft economy. So historians differ, but no one argues that Greenspan intentionally set out to harm Bush or help Clinton.
That was not the case 20 years earlier. The Nixon administration had enraged conservative economists like Milton Friedman by imposing wage and price controls in August 1971. This suppressed any signals of inflation. Yet the Fed, headed by Arthur Burns, increased the money supply nearly 15 percent between then and the 1972 election. The inevitable result was that inflation exploded when the controls were finally lifted in 1973.
Oval Office tapes later revealed that Nixon and aides discussed how to pressure Burns to ease the money supply prior to the election. Burns’ participation in the administration’s Camp David meeting that produced the price control was unusual, and in the view of many, inappropriate. Burns himself went to his death insisting that he had done nothing intended to help Nixon, but most historians agree that if he was not dishonest, he was exceedingly incompetent as a central banker.
Jimmy Carter certainly took a hit in 1980 from the high interest rates that prevailed during Paul Volcker’s anti-inflation campaign. Carter had named Volcker to the Fed 15 months earlier.
While he may have expressed resentment about Fed policy in private, Carter has never complained in public. Nor has anyone ever argued that Volcker or other Fed officials were influenced by desires to favor one party or another in 1980.
Some Democrats argue that did happen in 1982, when the Fed eased off its harsh anti-inflation stance prior to the election. But money growth figures are ambiguous. Federal Open Market Committee members from that era now say that they gave much consideration to Mexico’s going broke that summer, which touched off the Latin American debt crisis, but that no one thought of the U.S. elections.
Just a few years later, however, memories of 1982 Republican losses were sharp enough to motivate a shameful incident in which Reagan administration officials overtly recruited two new appointees to the Fed Board based on their willingness to defy Volcker and ease interest rates before the 1986 election. Volcker faced them down, but knowing he had the active opposition of the administration, he declined to be reappointed in 1987.
There is no evidence, however, that President Ronald Reagan himself pressed for Volcker’s departure or was even aware of efforts to force him out. He always professed public support of Fed anti-inflation policies.
That was not the case for Lyndon Johnson, who called Fed Chair William McChesney Martin to his Texas ranch in 1965 to chew him out for not maintaining low interest rates. Martin reportedly was shaken, but stood his ground and augmented his own record as the Fed chair who did the most to establish Fed autonomy within the government.
© 2011 Edward Lotterman
Chanarambie Consulting, Inc.
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