Lawrence Kudlow, President Donald Trump’s top economic adviser, raised eyebrows among some market watchers last week when he said he hoped the Federal Reserve would raise interest rates “very slowly.” The comments departed from a 25-year White House precedent of generally refraining from commenting on monetary policy.
Mr. Kudlow is the director of the National Economic Council, which was created in 1993 and first led by Robert Rubin, a former Goldman Sachs executive. Mr. Rubin, who later served as President Bill Clinton’s Treasury secretary, established a rule within the White House that officials shouldn’t publicly question the Fed’s rate-setting decisions.
Presidents George W. Bush and Barack Obama largely stuck to that practice.
So when top White House officials are asked about interest rates, they have tended to default to a standard say-nothing-meaningful script. “The Fed will do what they need to do, and we respect the powers of the Fed,” said Gary Cohn, Mr. Kudlow’s predecessor, in an interview on Fox News in March 2017.
Mr. Kudlow’s remarks followed comments in April by White House trade adviser Peter Navarro questioning the Fed’s plans to raise rates.
While Mr. Kudlow’s comments don’t “entail a wholesale change in policy and overt attempt to influence the Fed, we believe investors should watch for future instances of such behavior and if they become more frequent, this could potentially call the independence of the nation’s central bank into question,” said analysts at research firm Beacon Policy Advisors in a note to clients on Thursday.
Central bankers have long argued for independence from political pressure in setting interest rates. They say it allows them to make unpopular decisions in the economy’s long-run best interest, such as raising rates to curb inflation even if it means slowing growth, as then-Fed Chairman Paul Volcker did in the early 1980s.
“It was clear to me if you looked at the Volcker experience, for example, having an independent Fed in terms of its decisions and its credibility was critically important,” Mr. Rubin said in an interview last year.
Such a hands-off posture hasn’t always existed. Political pressure on Fed chairmen William McChesney Martin by the Johnson administration and on Arthur Burns by the Nixon administration to follow easy-money policies is widely blamed for contributing to high inflation in the 1970s.
“Martin, my boys are dying in Vietnam, and you won’t print the money I need,” President Lyndon Johnson told Mr. Martin in 1965, according to an oral history provided by Mr. Martin in a biography by Robert Bremner.
Mr. Rubin’s rule has largely held with a few exceptions that received attention at the time precisely because they departed from it.
1993: “We ought to have cooperation from the Federal Reserve.”
Shortly before Mr. Clinton’s inauguration in 1993, the man tapped to serve as his budget director, Leon Panetta, issued a pre-emptive call against Fed rate increases.
Mr. Panetta said at his confirmation hearing that to enact credible deficit reduction, “We ought to have cooperation from the Federal Reserve” in the form of lower rates, the Journal reported.
“If for any reason the Federal Reserve bails out on us, it’s going to be very tough then to try to meet” the targets, Mr. Panetta said, the New York Times reported.
1995: “There is a relationship here between short-term rates and the job loss…”
Two years later in an appearance on NBC’s “Meet the Press,” Mr. Panetta, by then Mr. Clinton’s chief of staff, was asked whether the Fed should cut rates to prevent a recession. The Fed had started a series of rate increases in 1994.
“It would be nice to get whatever kind of cooperation we can get to get this economy going,” he said in June 1995, the Journal reported. He laughed off a follow-up question about whether he was trying to jawbone the Fed, the Times said.
After payrolls declined sharply in the prior month, Labor Secretary Robert Reich also made the case for lower rates. “There is a relationship here between short-term rates and the job loss in construction and manufacturing, which are both interest-rate sensitive,” Mr. Reich said, according to the Journal.
The comments prompted the Times to note that Mr. Rubin’s policy of refraining from speaking about monetary policy “is clearly fraying,” even though Mr. Rubin insisted it was still in effect.
As it turned out, the economy was on the cusp of several years of strong growth, which made it much easier for the White House to stick to Mr. Rubin’s preference for a hands-off approach to the Fed.
2003: “I would be frustrated and concerned if there were not some upward movement [in rates].”
Shortly before he was sworn in as president in January 2001, President George W. Bush promised then-Fed Chairman Alan Greenspan he would never publicly criticize the Fed’s rate decisions. It was a particularly notable concession given how Mr. Bush’s father had been critical of Mr. Greenspan’s rate policies during both of his campaigns for president.
The closest the administration came to violating that promise was in October 2003, when then-Treasury Secretary John Snow told The Times of London that he would be “frustrated and concerned” if there weren’t some rise in interest rates given the rebound in the economy underway at the time.
The comments initially prompted a selloff in Treasuries, though they recovered after a Treasury spokesman walked back the remarks.
“The secretary was pointing out that when economies begin picking up steam, there is an increased demand for money, which naturally pushes interest rates higher,” said then-Treasury spokesman Rob Nichols. “The secretary respects the independence of the Federal Reserve in making decisions about our nation’s monetary policy,” he added.