In an uncompromising column for Bloomberg, the former president of the Federal Reserve Bank of New York warned current Federal Reserve members -- and current chairman Jerome Powell -- to ignore President Donald Trump and set responsible monetary policy no matter how much he tries to bully them.
According to Bill Dudley, who headed up the New York office between 2009 and 2018, and now is a senior research scholar at Princeton University’s Center for Economic Policy Studies, it is not the duty of the "enable" the president's poor decision -making when it comes to the nation's economy.
"U.S. President Donald Trump’s trade war with China keeps undermining the confidence of businesses and consumers, worsening the economic outlook. This manufactured disaster-in-the-making presents the Federal Reserve with a dilemma: Should it mitigate the damage by providing offsetting stimulus, or refuse to play along?" he wrote before advising, "If the ultimate goal is a healthy economy, the Fed should seriously consider the latter approach."
"According to conventional wisdom, if Trump’s trade war with China hurts the U.S. economic outlook, the Fed should respond by adjusting monetary policy accordingly — in this case by cutting interest rates. But what if the Fed’s accommodation encourages the president to escalate the trade war further, increasing the risk of a recession?" he asked. "The central bank’s efforts to cushion the blow might not be merely ineffectual. They might actually make things worse."
Noting Powell has pushed back at the president despite Trump's insults and threats, Dudley said that is the right path to follow.
"The Fed could go much further," he advised. "Officials could state explicitly that the central bank won’t bail out an administration that keeps making bad choices on trade policy, making it abundantly clear that Trump will own the consequences of his actions."
"Central bank officials face a choice: enable the Trump administration to continue down a disastrous path of trade war escalation, or send a clear signal that if the administration does so, the president, not the Fed, will bear the risks — including the risk of losing the next election," he concluded.
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