Fed Must Resist Politics, Not Play It Safe

The Federal Reserve's credibility depends on resisting politics and not playing it safe, according to Claudia Sahm, chief economist at New Century Advisors and a former Fed economist. At the Fed's annual conference in Jackson Hole last month, all eyes were on Federal Reserve Chair Kevin Warsh as he delivered his first speech.

Kenneth Rogoff, a Harvard economist who spoke at Jackson Hole, suggested that the Fed should delay its rate decision until after the midterms to avoid conflict with President Donald Trump. However, Sahm argues that playing politics would be a terrible strategy for the Fed.

Sahm points out that in 1983, Rogoff himself wrote a paper showing that central bank credibility is crucial in fighting inflation. The model demonstrated that if the head of the central bank is more averse to inflation than the average person, it can lower expected and actual inflation. Sahm notes that this model did not consider a president threatening to fire the Fed chair or remove governors.

Sahm emphasizes that playing politics would mark a real shift in the Fed's behavior. She cites data showing that the Fed has changed its target 45% of the time over any two-month period from 1984 to 2024, and 43% of the time during federal election periods. Recent examples include the Fed hiking rates before the 2022 midterms and cutting rates before the 2024 election.

Sahm argues that the Fed does not have to play politics to protect itself, as Congress built the Fed precisely for moments of political pressure. She also notes that the Supreme Court blocked Trump's attempt to remove Fed Governor Lisa Cook earlier this year.