Trump treasury chief carefully signals support for US Fed’s independence
US Treasury Secretary nominee Steven Mnuchin isn’t jumping on the Republican bandwagon to audit the Fed.
In written questions by senators following his confirmation hearing on Thursday, Mnuchin was asked about his thoughts on “politicising decisions made by the Federal Reserve Board of Governors and the benefits of an independent central bank.”
Mnuchin’s answer was crafted carefully.
“The Federal Reserve is organised with sufficient independence to conduct monetary policy and open market operations,” Mnuchin responded to Senator Bill Nelson, a Florida Democrat. “I endorse the increased transparency we have seen from the Federal Reserve Board over recent years.”
The response appears to lean against legislation such as the Fed Oversight Reform and Modernization Act of 2015, or FORM Act, which was introduced in the House of Representatives but never became law, that would have subjected the central bank’s monetary policy decisions to greater congressional scrutiny.
As a candidate, President Donald Trump took aim at the Federal Reserve for playing politics, challenging its legitimacy as an independent institution. He accused the central bank of keeping interest rates low to benefit Barack Obama’s administration.
Mnuchin’s comments are “certainly endorsing the principal, if not every current detail of the practise of Fed independence,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. “He does not want to make waves at this stage.”
The seven-seat Fed Board in Washington currently has two vacancies, while Janet Yellen’s term as chair ends in February 2018 and Stanley Fischer’s term as vice chairman ends in June 2018. Trump can nominate his own choices for those positions, giving him significant scope to shape the Fed’s leadership and raising questions about the central bank’s future relationship with the Treasury and White House.
“People are asking questions and are curious if the Trump appointments could effect the conduct of policy,” said Paul Mortimer-Lee, chief economist for North America at BNP Paribas in New York. “I think it will be very tough to change very much” with the Fed’s mandate for stable prices and full employment so well established.
The FORM Act would have required the Federal Open Market Committee, the Fed’s policy panel, to submit its policy rule to Congress. If the Fed deviated from its rule, it would be subject to review by the Government Accountability Office and potentially an audit.
The bill got bogged down in the Senate. Yellen opposed the FORM Act in a letter to Congress in November 2015, calling some of its provisions “significantly flawed.” A bill with similar requirements for the Fed called the Financial Choice Act hasn’t proceeded since being introduced last year.
Mnuchin’s comments point to the fact that the Fed doesn’t have constitutional independence. That’s protected more by organisation of the system, as Mnuchin highlighted, where the heads of 12 regional Federal Reserve banks are appointed by private citizens. That’s a check against the influence of the White House appointees on the Fed Board.
Mnuchin also limited his discussion of independence to monetary policy. That could be significant if it suggests that Fed decision-making on financial regulation and crisis management will be up for challenge and debate under Trump.
“There needs to be more democratic accountability at the Fed but he seems to be OK with the status quo,” said Jeff Hauser from the Center for Economic and Policy Research in Washington.