Fed Should Resist Politics, Not Play Along

Kenneth Rogoff's advice to the Federal Reserve to 'lay low and wait' until after the midterms is misguided, according to Claudia Sahm.

Rogoff suggested that the Fed should delay its rate decision until after the election to avoid provoking President Trump. However, Sahm argues that playing politics would be a terrible strategy for the Fed.

In 1983, Rogoff himself wrote a paper showing that central bank credibility is crucial in fighting inflation. His model demonstrated that when a central banker is more committed to low inflation than the average person, it leads to lower expected and actual inflation.

Rogoff's own research suggests that credible central bankers can make a significant difference in economic outcomes. However, he has since suggested that his earlier work does not apply to today's situation, where Trump has threatened to fire the Fed chair and remove governors.

Sahm disagrees, pointing out that there is no evidence that the Fed's decisions are affected by election timing. In fact, recent examples suggest that the Fed makes its rate decisions based on economic data, not politics.