The Real Threat to the Fed’s Independence Is Wall Street, Not Trump

Trump’s attacks on the Federal Reserve are norm breaking, but the financial industry’s influence over the central bank is far more unsettling.

By Jordan Haedtler and cross-posted from Washington Monthly

When Donald Trump shred yet another norm late last month by commenting on monetary policy and criticizing Federal Reserve Chair Jay Powell for raising interest rates, frenzied pundits speculated about whether Trump will respect the Fed’s “independence,” long deemed sacrosanct.

This was not the first time Trump had spoken about his policy preferences at the Fed. During his campaign, he demagogued against then-Chair Janet Yellen and condemned her low interest rate policies—then immediately reversed his views after taking office. In this as in so many other policy areas, Trump’s behavior is both incoherent and self-serving.

But the real threat to the Fed’s independence isn’t coming from Trump—it’s coming from Wall Street. The Fed’s structural flaws have led to regulatory capture, which compromises its ability to set monetary and regulatory policy in a manner that isn’t tilted to favor those at the very top of the economic ladder. Trump may have broken a norm by commenting on monetary policy, but the Fed’s status quo is unaccountable, opaque decision-making shaped by deep conflicts of interest with the very financial institutions the Fed is ostensibly supposed to supervise.

Consider, for instance, the abrupt resignation in March of David Cote from the New York Fed’s board of directors—a move that came as a shock to many Fed watchers. Cote was one of just a couple people responsible for choosing the next president of the New York Fed, the most powerful economic policymaking position in the country that Trump doesn’t control. Yet before the search for New York Fed President Bill Dudley’s successor had formally concluded, Cote left the board to pursue “new business opportunities that could affect his eligibility to serve”—later revealed to be helping Goldman Sachs undertake an ambitious corporate acquisition strategy.

The New York Fed claims that Cote and his fellow board members had already decided on former San Francisco Fed President John Williams to succeed Dudley by the time that Cote announced his resignation, but that means that Cote was simultaneously negotiating a new gig at Goldman Sachs while selecting one of Goldman’s top regulators

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