Political bias unlikely to affect Fed's election-year policies
Next year is an election year, so the economy should be in good shape. The Federal Reserve System will boost the economy to support the reelection of the incumbent, President Reagan. The stock market should also do well in 1984.Skip to next paragraph
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That's a widely held view - and there is something to it.
But the real story, says W. Lee Hoskins, chief economist with Pittsburgh National Bank, is that Fed policymakers are inhibited by the political heat of an election year from making any major policy changes. They are most likely to follow a steady-as-you-go policy. Change might upset political apple carts. The Fed is a semi-independent creation of Congress, and the central bankers don't want to get into a political stew that may endanger their independence.
''They aren't trying to help a particular person,'' noted Mr. Hoskins in a telephone interview. ''They want to be apolitical.''
But that apolitical stance can mean not taking any major action. For instance , if a strong expansion is under way and threatening to step up the inflation rate, the Fed may not tighten money and raise interest rates substantially for fear of choking off the recovery just before an election. Also, higher interest rates are politically unpopular.
Mr. Hoskins was, until he joined the Pittsburgh bank four years ago, an economist with the Fed for 10 years. As chief economist with the Fed branch in Philadelphia, he often sat through meetings of the policymaking Federal Open Market Committee (FOMC). He never heard any of the seven governors or 12 regional bank presidents attending those meetings every five weeks speak of the desirability of taking monetary action for political reasons.
Another former Fed economist, Jerry L. Jordan, agrees. ''The subject never comes up,'' says the professor of management at the University of New Mexico. Nor has any of the many governors and several board chairmen this reporter has spoken to over the years, often on a background basis, ever even hinted that some action was taken for partisan purposes.
Those with a consipiratorial bent may argue that such partisan discussions would only take place between a president and the Fed chairman on a one-to-one basis. It's possible that has happened.
Mr. Jordan suspects - but doesn't know for sure - that Arthur F. Burns may have had some political motivation when he insisted on holding interest rates steady in 1972 when President Nixon was running for reelection. The economy was rebounding and that normally would imply rising interest charges if money-supply growth was to be held modest.
However, Dr. Burns was also chairman of the Committee on Interest and Dividends - the equivalent in the financial sector of similar bodies controlling wages and prices at that time. He could argue that if interest rates rose, it would mean greater profits for lenders and be unfair to those with frozen wages or prices.
Whatever, Dr. Burns or any Fed chairman must persuade at least six other governors or regional bank presidents to vote with him on the 12-person FOMC (only five bank presidents vote) to maintain or change a specific monetary policy. As the voting records show, there is a tendency for the members of the FOMC to vote with the chairman. But that is more likely a factor of common perceived policy needs than partisan views.
Indeed, notes Mr. Jordan, the majority of FOMC members today were appointed by President Carter, and, if anything, might be regarded as pro-Democrat. Indeed , Governor Lyle E. Gramley, a member of President Carter's Council of Economic Advisers, has given some economic advice to Walter Mondale. Anthony Solomon, president of the powerful New York Fed, was an undersecretary in the Treasury during Carter's administration.
If the members of the FOMC actually did vote for partisan reasons, then President Reagan might well be trembling in his political boots. But, in fact, the members of the FOMC generally have considerable respect for their institution and a basic desire to promote the economic welfare of the nation - not that of a particular presidential candidate.
Nonetheless, as Mr. Hoskins notes, presidential election years ''are not conducive to coping with policy problems.''
In the area of fiscal policy, Congress and the President have not yet tackled the budget deficit with the necessary vigor. Monetary policy, Mr. Hoskins adds, focuses on smoothing interest rates and has been producing wide swings since 1979 in the growth of the nation's money supply - the fuel for economic growth.
The most likely result of this election brew, he says, is continued economic expansion in 1984, followed by some post-election problems.
That has happened in the past. Soon after the elections of 1972, 1976, and 1980, interest rates rose sharply when the Fed roped in excessive monetary expansion. Mr. Hoskins argues the same thing could happen in late 1984. He suspects the Fed will reverse its recent monetary stringency in order to prevent an election-year recession, but this will go too far and result in post-election stringency.
''When elections are out of the way, policymakers often react with a vigor that they are unable to muster during the election years,'' he says.
Of course, it could be that Paul Volcker and his colleagues could be frightened by signs of renewed inflation and stick to tight money. The Fed did allow a recession in 1960 (Nixon lost to Kennedy) and 1980 (Carter lost to Reagan).
Michael Sivy, research director at Argus Research Corporation, explains the 1980 episode as an effort to stop an explosive surge in inflation with somewhat tighter money, to be followed by a switch to easier money to prevent a recession at poll time. But the effort to fine-tune the economy didn't work, and Carter lost his reelection bid.
If a president could really control the Fed, it would be a great political boon for him. But he doesn't, and that is why Treasury and other administration officials have lately been calling on the Fed to loosen its current tight money policy.