There is a saying, when in a hole stop digging.
Unfortunately for former Goldman managing director and NY Fed president, Bill “let them eat iPads” Dudley, that is a saying he is not familiar with, and one week after his stunning Bloomberg op-ed in which he advocated the Fed to prevent Trump’s 2020 re-election by sending the economy in a recession, resulting in a brutal response from virtually everyone who slammed Dudley’s musings as the final proof that the Fed was in fact a political animal, one which is more powerful than the executive branch in its ability to pick and choose presidents, Dudley is out with an “explainer”, seeking to “answer” some of the main questions posed by his “provocative” piece.
After reading “What I Meant When I Said ‘Don’t Enable Trump“, let’s just say that Dudley fails in explaining why he said is not what he said, and if anything he has successfully doubled down, giving Trump even more ammunition to throw the book at the political Fed for not cutting rates fast enough as the president has been demanding for months, and for eventually taking the blame for the coming economic and market crash.
Dudley’s letter, written in rhetorical Q&A format, begins by asking himself what motivated him to write this article. His answer is two fold:
First, President Trump’s trade war with China was increasing uncertainty about how global trading rules would evolve, what tariffs would be imposed, what changes firms might need to make to their global supply chains, and what the downside risks might be for the U.S. economy. Just a few days before the article was published, the president ordered U.S. firms to pull out of China.
Second, the president continued to attack the Federal Reserve and push it to ease monetary policy further. He emphasized that the Fed, not the White House or its trade war with China, should be blamed if the economy faltered. His attacks on the Fed included characterizing Chairman Jerome Powell as an “enemy” — on par, in his view, with President Xi Jinping of China.
As Dudley “saw it”, the combination of the trade war and the president’s attacks on the Fed “threatened to put the central bank in an untenable position”, one where Trump was shifting responsibility for the downside risks from his trade war onto the Fed. “I thought this was an important issue worth exploring.”
What Dudley means here is that whereas traditionally the Fed has been commended for bailing out
banks the world by throwing trillions of dollars at a problem and hoping it goes away, even though some time in 2016 it became clear that this approach was doomed to failure and so it would be great to have a hapless scapegoat in the White House – i.e., someone such as president Donald Trump – to take the blame for decades of disastrous monetary policy which has resulted int he world’s biggest asset bubble in history, what happened next was not part of the program, namely Trump flipping the table on the Fed and making it the key catalyst for the upcoming US recession.
Indeed, one can say that Trump – painted daily as a bumbling buffoon by his enemies, and sometimes, friends – has in fact played his cards perfectly, demanding the Fed cut rates well into late 2018, something which the Fed eventually did, and giving Trump all the leverage in claiming that he was, in fact right, and the Fed was wrong. Certainly, with the market now expecting 4 or more rate cuts by the end of 2020 and tying the fate of the S&P to this expectation being fulfilled, one can argue that Trump will be even more right, and that the Fed – who can forget Powell’s famous statement that we are “a long way” from neutral less than a year ago when the Fed chair was still hawkish – was not only wrong, but clueless.
As such, one can counter Dudley’s rambling, defensive op-ed part 2 published today in Bloomberg, by simply pointing out that the reason for the former Goldman banker’s anger is not so much Trump’s trade war with China – which increasingly more Americans agree with and even Trump’s enemies concede was long overdue – nor Trump’s “attacks” on Fed independence, of course the Fed was never actually independent as anyone who remembers how LBJ literally attacked a Fed chairman in 1965, demanding more money, knows very well, but because Trump managed to quickly and effectively outsmart the Fed, and box the Fed chairman so that the Fed is now forced to underwriter Trump’s trade war, as we explained first one month ago.
So, apparently unable to express what he meant the first time around and sparking a firestorm of criticism, what was Dudley’s oh so complicated message that was lost in translation:
First, the Fed needs to be cautious that it does not inadvertently enable the president’s trade war with China.
As I wrote: “what if the Fed’s accommodation encourages the president to escalate the trade war further, increasing the risk of recession? The central bank’s efforts to cushion the blow might not be merely ineffectual. They might actually make things worse.”
In my judgment, there is a risk that the Fed, by easing, might encourage the president to take even more aggressive actions on trade and in raising tariffs. This might create even greater downside risks for the economy that monetary policy might prove ill-suited to address.
One can argue that this is a credible complaint. The only problem is Dudley should be addressing his anger not at Trump, but at Powell, who certified before the world that any further escalations in Trump’s trade war are effectively a justification for more rate cuts, for one simple reason: the US economy was doing well enough not to need a rate cut, yet the Fed – having become the world’s central bank – desperately needed a pretext to cut, and found one in Trump’s trade war. Whether this was Powell’s intention is unclear, although as we said at the time, “it certainly means that Trump is now de facto in charge of the Fed’s monetary policy by way of US foreign policy, and it also means that as BofA wrote, “the Fed is unintentionally underwriting the trade war.”
Of course, what Dudley is concerned about is not the trade war itself, but how it could implicate the Fed as the global economy continues to grind to a halt, and as he says, “the Fed’s problems might not end there. Not only might the Fed be unable to rescue the economy, but it also might be blamed for the economy’s poor performance. This risk is higher because of the president’s ongoing attacks on the Fed.” This is a point he echoes toward the end of the article as well, writing that “I don’t think the Fed should be attacked for the economy’s performance when the president’s own actions are creating the downside risks.”
Bingo: that’s it right there – the “risk” that the Fed may be blamed for not just the “economy’s poor performance” but that the great unwashed masses may one day wake up and realize that the reason why the global financial system is facing a crisis of monumental proportions has nothing to do with Trump – who is merely a vessel and a symptom of a broken system – and everything to do with a central bank which ever since its creation in 1913 has had one purpose, to make the rich richer and perpetuate a broken monetary system (even Mark Carney is saying the days of the dollar as a reserve currency are now over), is why Dudley is so very much on edge. After all, those same great unwashed masses, following the moment of epiphany may pay Dudley a visit in his mansion and demand an explanation of their own why everything has gone to hell, as it almost certainly will after the next recession.
Once one realizes that this is the true motive behind not just today’s Dudley article, but also his prior op-ed, then everything falls into place, including Dudley’s hint that the Fed’s actions will affect the “political outcome in 2020.”
Addressing what was arguably the most sensitive aspect of his original oped, namely the conclusion which suggested that the Fed should throw the economy into recession just to prevent Trump’s re-election, to wit:
“There’s even an argument that the election itself falls within the Fed’s purview. After all, Trump’s reelection arguably presents a threat to the U.S. and global economy, to the Fed’s independence and its ability to achieve its employment and inflation objectives. If the goal of monetary policy is to achieve the best long-term economic outcome, then Fed officials should consider how their decisions will affect the political outcome in 2020.”
… Dudley says that his “intention was to be provocative.” So what was his intention, if not to bring attention to the fact that contrary to countless lies, the Fed was never independent? He explains:
I was exploring where logic might take you if you started with two premises: 1) President Trump’s trade war was likely to be bad for the U.S. economy, and 2) the Fed’s goal is to achieve the best long-term economic outcome with respect to employment and inflation. In such circumstances, how should the Fed behave and what should it consider?
I was suggesting that if the Fed pushed backed that it might be able to achieve a better economic outcome. I was not suggesting that the Fed should do so regardless of the consequences for the economy or that it should stand by and allow a recession. And I was not trying to suggest that the Fed should take sides in the upcoming election.
So… Dudley’s point is that the Fed is not political, and yet it should push back on the president’s decisions to “achieve a better economic outcome”? A quick question here: Better for who? The banks, which were the only beneficiaries of Fed policies for the past decade? The 0.01% who got richer and richer since the financial crisis as the US middle class disappeared? And then there is the question of what mandate does the Fed have, in Dudley’s eyes, to one up the president when it comes to the best economic outcome.
Actually, an even simpler question: who “elected” the Fed? And just whose interests does the Fed represent? Maybe for the third part of his increasingly surreal op-ed series, Bill Dudley can start with a discussion of just how the Fed – an entity which as Bernanke’s former advisor once said: “people would be stunned to know the extent to which the Fed is privately owned” – represents the interests of the majority of Americans.
Then again, we doubt there will be a part 3 as by this point the backpedaling in Dudley’s “explainer” was so furious, not even he had any idea what it was he was trying to say, as the following “Q & A” confirms:
Q. Do you think the Fed should conduct monetary policy with an eye on influencing the outcome of the 2020 presidential election?
A. I do not. Doing so would be far outside the scope of the Fed’s authority and clearly inappropriate. Moreover, the Fed would be perceived as partisan and such a perception would likely compromise the Fed’s independence. Behaving in such a manner not only would be wrong, but it also would not be in the Fed’s interests.
So, it’s not within the scope of the Fed’s authority to influence the outcome of a presidential election as that would “compromise the Fed’s independence”, but it is the scope to “achieve a better economic outcome” than that pursued by the president? Interesting, please tell us more.
And so he does, when in the very next rhetorical answer, Dudley tries to reconcile what he wrote in: “Fed officials should consider how their decisions will affect the political outcome in 2020.”
I think central bankers should be aware of all the factors that affect the economic outlook. What the Fed does or doesn’t do can influence electoral outcomes, which in turn can have consequences for the economy and for monetary policy. But the Fed should never be motivated by political considerations or deliberately set monetary policy with the goal of influencing an election.
In other words, be aware of how your actions could sink Trump’s reelection chances, but… don’t follow through on them, especially since that would confirm the issue raised above, namely that the Fed was never independent and apolitical, and would culminate with the end of the US Federal Reserve, And yes, it is ironic that Dudley’s letter has done more damage to the perception of Fed “independence” than hundreds of Trump tweets slamming Powell.
In parting, and having “resolved” any speculation that he was calling for a monetary coup against the president – at least in his own mind – Dudley touches on the two most important points address in his letter, Fed independence, and what on earth prompted Dudley to write the original “hornets nest” op-ed in the first place.
So, on the first topic, whether “the Fed has been politicized”, Dudley answers:
In my view, President Trump’s persistent attacks on the Fed have politicized the central bank. People now wonder whether the president’s attacks are influencing the Fed’s decisions. For example, if the Fed eases monetary policy further at its upcoming September policy-making meeting, people are likely to wonder about the motivation. Is it concern about the economic outlook, or the president’s attacks on the Fed? In contrast, I don’t believe the Fed is politicized in the sense that it would consider trying to influence election outcomes.
Once again, the Fed was always politicized (see LBJ vs William McChesney Martin, and countless other examples of presidents bossing Fed Chairs around), but it desperately tried to deflect attention from this to avoid being called into Congress any time the leading political party needed lower rates to pursue a voter-friendly agenda, as will be the case with Helicopter money, aka MMT, in a few years, when the Fed will no longer be an independent entity in any capacity, and will be tasked with monetizing all the debt the US issues to pursue its Green New Stupidity.
However, where Dudley made a catastrophic fuck up is by himself suggesting that the Fed should not only try but succeed in influencing an election outcomes. It is this potentiality that sparked the outcry from both Democrats and Republicans, both Austrians and Keynesians alike, as that level of truth only emerges during periods of tremendous shock.
And, if nothing else, the second Dudley op-ed confirms that Dudley was in indeed in “shock” when he wrote his first Bloomberg column. And just in case there was any doubt, we leave readers with Dudley’s conclusion, one in which the former NY Fed president says that while there may be a “deep state” or a conspiracy, he is part of neither:
The article is mine and mine alone. Fed officials were not involved in any way. There is no “deep state” or conspiracy that I am part of. Fed officials are not using me as a vehicle to signal their unhappiness with the president’s attacks on the central bank and on Chairman Powell.
And the absolute punchline: “I wrote the article to express my concern that the president had placed the negative economic consequences of his trade war at the feet of the Fed, and that Fed officials had not pushed back against this more forcibly.” Which is amusing, because after all those often contradictory words, Dudley leaves his readers where they started: asking him how the Fed should “push back more forcibly” against the president, one which the Fed can prevent from getting re-elected – as Dudley himself admitted last week – if it only chooses, but it would never choose to do so as it is so apolitical, it should push to “achieve a better economic outcome” than the one sought by the president.
In short: if Dudley had dug the hole 6 feet deep with his original op-ed, he added a good 6 more feet with the sequel. We can’t wait what “Deep State Dudley” does for part 3…