The Federal Reserve Isn’t Political. Well, Not Exactly.

In an interview with 60 Minutes that aired Sunday, Federal Reserve Chair Jerome Powell was asked “to what degree does politics determine your timing” of when to reduce interest rates? Powell firmly replied that “we do not consider politics in our decisions. We never do. And we never will.” Well, not exactly. The Fed won’t use its powers in setting monetary policy to influence who wins the White House this year, but some of Powell’s answers suggested the central bank will do what it can to ensure that it maintains its current powers after the election.

There is no denying that the Fed is caught in the political crosshairs. The economy is always an important issue for American voters and the Fed’s actions this year, perhaps more than ever before, will shape how strong the economy is on Election Day in November. And so, politicians — on both sides of the aisle — are dialing up their pressure on policymakers at the Fed. Former President Donald Trump said recently that he believes the Fed is “going to do something to help the Democrats,” like lowering rates, and that he would fire Powell if reelected. Democrats such as Senator Elizabeth Warren of Massachusetts told the Fed to cut rates to improve housing affordability - a major concern among voters.

The reality is that political ties are mixed on the central bank’s Federal Open Market Committee, the group that decides monetary policy. Powell, for example, is a Republican who was appointed by Barack Obama to be a Fed Governor, and then by Trump to be Fed Chair, and re-appointed by Joe Biden. The rest of the Board consist of two Trump appointees and four Biden appointees. The politics of the regional bank presidents are not public, but likely vary. For an institution that does monetary policy by consensus, there’s no consensus on politics at the Fed.

Nevertheless, Powell was mistaken when he suggested the Fed has a ”historical record” of keeping politics out of its decisions. One of the darkest hours in the central bank’s history came in 1972, when Chair Arthur Burns held rates too low in an effort to boost the economy in support of Richard Nixon’s reelection campaign. The explicit coordination was later confirmed in the Nixon tapes. Worse still, inflation roared back after Nixon’s was reelected.

The Fed acknowledged its mistake and vowed never to repeat. One reason is to preserve its independence from direct political control, which is viewed as key to its dual mandate of seeking stable prices and maximum employment.1 This spirit of independence is why the Fed steers clear of commenting on or trying to influence fiscal policy. At apress conference in June, Powell dodged a question in the topic, saying, “I think trying to get into that with lawmakers would be kind of inappropriate, given our independence and our need to stick to our knitting.”

So why did Powell just a few months later and on national television weigh in on the long-term sustainability of the federal debt, immigration and geopolitics — all of which are hot-button political issues? One could argue that the second two issues are tied to inflation via the labor market and supply chains, but not long-term debt. “The US is on an unsustainable fiscal path,” Powell said in a lengthy response, adding that Congress should have an “adult conversation” about the fiscal situation. Powell may personally worry about the size of the federal debt, but when he speaks in public he speaks for the Fed. So, what is the Fed trying to accomplish?