Fed Credibility at Risk in Rate Decision Showdown

The Federal Reserve's credibility is on the line as it prepares to make its next rate decision. Some, like Harvard economist Kenneth Rogoff, have suggested that the Fed should consider delaying its decision until after the midterm elections to avoid conflict with President Donald Trump.

Rogoff, who was speaking at Jackson Hole in August, advised the Fed to 'lay low and wait until the winter' if it wanted to preserve its independence. However, this approach would be a mistake, according to some experts.

A junior economist at the Fed, also named Kenneth Rogoff, wrote a seminal paper on central bank credibility in 1983. His model showed that having an inflation-fighting head of the central bank can lead to lower expected and actual inflation. This is because people trust the central bank more when it prioritizes fighting inflation over politics.

Rogoff's advice to delay the rate decision may be based on a different set of circumstances, but some argue that playing politics would undermine the Fed's credibility even further. The Fed has historically made its decisions based on economic data, not electoral calendars.