Fed Should Ignore Electoral Pressures, Focus on Economy

A senior economist at Harvard, Kenneth Rogoff, recently offered advice to the Federal Reserve on how to preserve its independence from President Donald Trump's attacks. However, according to Claudia Sahm, a former Fed economist and chief economist at New Century Advisors, playing politics is a terrible strategy for the Fed.

Rogoff suggested that the Fed should delay any rate decision until after the midterm elections in November. This would allow the institution to avoid further conflict with Trump, who has threatened to remove several Fed officials, including Chair Jerome Powell. However, Sahm argues that this approach would undermine the Fed's credibility and create a precedent for central banks to prioritize politics over economic policy.

The data suggests that the Fed's decisions are not affected by election timing. In fact, a study found that there is no evidence of monetary manipulation by the Fed during elections. The exception was during the Nixon era, when the Arthur Burns-led Fed supported his reelection campaign and contributed to higher inflation.

Sahm argues that the Fed should ignore electoral pressures and focus on making decisions based on economic data. She notes that the institution's independence is not dependent on its ability to appease politicians, but rather on its willingness to make tough choices in the face of pressure. In this case, Sahm advises the Fed to 'forget the electoral calendar' and prioritize the economy over politics.