A Trump dilemma: Finding a dovish GOP ally to serve on Fed

WASHINGTON – The withdrawal Thursday of Stephen Moore, President Donald Trump’s choice for the Federal Reserve board, has thrown a spotlight on the tough task Trump has set for himself: Finding a rare conservative ally who both favors cutting interest rates and is respected enough to win Senate confirmation.

Frustrated by the Fed’s handling of rates under Jerome Powell – his own choice to be chairman – the president tapped two outspoken political boosters to fill a pair of vacancies on the Fed’s board. One, Herman Cain, withdrew from consideration last week amid renewed scrutiny of sexual harassment and infidelity allegations that first surfaced during his 2012 presidential campaign.

And on Thursday, Trump tweeted the news that Moore “has decided to withdraw” from consideration for a second vacancy. As it happened, Trump’s tweet came just hours after Moore had told some news organizations that the White House was fully behind him.

Moore had faced rising opposition on Capitol Hill, both because of a slew of sexist writings and concerns that he wasn’t qualified to serve on the world’s leading central bank.

Together, Cain, a former pizza company executive, and Moore, an economics commentator, represented a brash effort by Trump to reshape the Fed to his liking. Now, with both of them out of the picture, Trump might have to leave two of the seven seats on the Fed’s board unfilled, at least for a while.

The Fed can function normally with less than a full complement of members, although Trump appears to want to install perceived loyalists on the board to press for rate cuts. That effort puts him in conflict with the Fed’s hard-won independence from political influence, which is widely regarded as vital to healthy markets and stable prices.

On Wednesday, John Thune, the second-ranking Republican senator, had noted that Moore “has issues up here” and said there were “ongoing discussions” with the White House about it. (Moore had yet to be formally nominated.)

Also on Wednesday, the Fed ended its latest policy meeting by signaling that it was unlikely to either raise or cut rates in coming months. Its decision came a day after Trump tweeted that the Fed should cut rates by a full percentage point – a move that almost no mainstream economist would advocate. For months, Trump has been denouncing Powell’s leadership of the Fed as insufficiently favorable toward low rates.

Asked at a news conference after the Fed’s meeting about Trump’s attacks, Powell replied that the central bank is a “nonpolitical institution” that doesn’t consider outside criticism in making its policy decisions.

Many economists, both liberal and conservative, suggested that Moore was chosen mainly for his allegiance to Trump’s priorities. He had long identified as an inflation “hawk” who favored keeping rates high enough to fight inflation, even when the economy was weak. Lately, he sounded much more like a “dove,” aligned with Trump’s demand for low rates even with the economy on solid footing.

Numerous GOP senators had also said they objected to Moore’s disparaging past writings about women or sidestepped questions about whether they would back him for the Fed.

It’s not unusual for presidents to nominate for the Fed people they think generally share their views on the economy and interest rate policy. But most economists saw Moore and Cain as far more politically minded than is typical.

“The difference here is that (previous) loyalists have nearly always had a baseline of credible expertise that both Moore and Cain lack,” said Peter Conti-Brown, a professor at the University of Pennsylvania’s Wharton School and author of the 2016 book, “The Power and Independence of the Federal Reserve .” “That is a major problem and responsible for much of the opposition to those nominees.”

Moore, who works at the conservative Heritage Foundation, has written ideological commentaries for more than two decades. He also founded the Club for Growth, a political group dedicated to pushing for tax cuts. That’s a vastly different profile from most previous Fed officials, who typically come from the ranks of academia or business.

“If their top qualification is that they’re loyalists, then they shouldn’t be on the Fed,” said Douglas Holtz-Eakin, President of the right-leaning American Action Forum and chief economist on President George W. Bush’s Council of Economic Advisers.

Yet Trump has only a shallow pool to pick from. He is pushing for the Fed to lower short-term rates, and he attacked Powell, in particular, for having overseen a rate hike in December, the fourth of 2018.

Many hawks, including Moore, spent much of the eight years after the Great Recession under President Barack Obama calling for the Fed to raise rates, a step that typically slows the economy by reducing borrowing and spending.

“You’re drawing from the Republican ranks, and a lot of those individuals are going to have a history of being hawkish, particularly during the past decade,” said Tim Duy, an economics professor at the University of Oregon.

One of Trump’s more traditional picks, Marvin Goodfriend, ran aground last year in the Senate, in part because his past support for rate hikes led Democrats to oppose him.

Moore’s support for rate cuts put him in a problematic position, said Scott Sumner, an economist at George Mason University’s Mercatus Center.

“If his changing views on policy were motivated by politics, then it doesn’t reflect well on him” as a potential nominee, Sumner said. If, on the other hand, his current views are sincerely motivated, Sumner added, then it raises questions about why he supported higher rates when the economy was in recession.

“It’s kind of awkward either way,” Sumner said.

A few potential Fed nominees who might satisfy Trump’s hunt for a political conservative inclined to cut rates have emerged. One, David Beckworth, a research fellow at George Mason University, was a Treasury official in the George W. Bush administration and has seemed favorable toward rate cuts for years, Conti-Brown said.

Beckworth declined to comment.

But many economists who are sometimes mentioned as potential Republican picks for the Fed, including John Taylor, a leading Stanford University economist, have a history of skepticism toward rate cuts.

During the 2016 presidential campaign, Trump accused Janet Yellen, who had been chosen as Fed chair by President Barack Obama, of having kept rates too low to benefit Obama.

The history of the past several decades has caused many economists to embrace the notion of an independent central bank. President Lyndon Johnson famously dressed down Chairman William McChesney Martin for presiding over Fed rate hikes and asked his aides about firing him, just as Trump has done with Powell. Richard Nixon also pressured his hand-picked Fed chairman, Arthur Burns, to keep rates low.

Most economists say such threats to the Fed’s independence contributed to the runaway inflation of the 1970s. Some argue that Burns succumbed to pressure from Nixon and held off on raising rates before the 1972 election, which Nixon won.

Inflation remained dangerously high for a decade. It was tamed only when Chairman Paul Volcker boldly raised rates to nearly 20 percent, causing a recession in the process. Volcker’s success in defeating high inflation provided further support for the notion that the Fed operates best when independent of political pressure.

“We’ve done a good job of de-politicizing the Fed,” Sumner said. “We’re in a different era now.”

Volcker, Alan Greenspan, and Ben Bernanke were all appointed and then re-appointed by presidents of different parties, Sumner noted. Trump broke that pattern when he declined to re-appoint Yellen and chose Powell instead.