Barron’s compiled daily client memos from Greg Valliere, a Washington-based strategist with Horizon Investments, under the headline “Will Trump and Cruz’s Fed Feud Rattle Markets?” Subhed: “The two leading GOP candidates want to curb the Federal Reserve. Could that shake up stocks?”
Valliere notes that the three living retired Fed chairmen and the current Fed chair proclaimed that the U.S. economy is not in a bubble and not close to a recession, contrary to claims that Trump-on-the-Stump recently made. He also expresses mild consternation that Mr. Trump and Sen. Cruz would favor “an audit of the Fed’s policies,” that they are aligned with Tea Party Republicans who want to curb the New York Fed’s authority, and that they would mandate conditions under which the Fed could raise or lower interest rates.
He goes on to say, “Our bottom line is that a dispute between the Fed and Trump or Cruz could worry the financial markets if either candidate is perceived as having a chance in November. Anti-Fed legislation has been stalled in Congress, largely because it would face a certain veto from Barack Obama.”
Where to begin?
First let’s set one fact straight. Anti- (or, more specifically, Audit) the Fed legislation has twice passed the House, both by large bipartisan margins. It has been stopped by Sen. Bob Corker, a member of the Senate Banking Committee, whose vote would have been essential to committee passage. Senate Banking Chairman Shelby also made clear that he was for an audit of Fed policies rather than the wide-ranging audit Bill.
President Obama’s anticipated veto had nothing to do with it.
Next, Mr. Valliere’s deference to the Fed is endearing but puzzling. According to the Washington Post‘s Ylan Q. Mui, the Fed’s economic projections are the laughingstock both of Wall Street and Washington.
Those are the projections on which, presumably, its decisions to ease or tighten are, at least in part, are based. (Or else why bother going through the incredibly elaborate, laborious process of making such projections?) As I wrote here in my column at Forbes.com:
Now comes one of the world’s top monetary reporters, Ylan Q. Mui, to make a delicate observation at the Washington Post’s Wonkblog, in Why nobody believes the Federal Reserve’s forecasts. Mui:
“The market recognizes that the Fed has repeatedly erred on the optimistic side,” said Eric Lascelles, chief economist at RBC Global Asset Management. “Fool me 50 times, but not 51 times.”
Even the government’s official budget forecasters are dubious of the Fed’s own forecast.[…]
With admirable intellectual honesty an assistant vice president in the Federal Reserve Bank of New York’s Research and Statistics Group, Marco Del Negro, Wharton Ph.D. student Raiden Hasegawa and University of Pennsylvania professor of economics Frank Schorfheide (speaking for themselves and not the Fed) open a two part analysis at the NY Fed’s own excellent Liberty Street Economics, Choosing the Right Policy in Real Time (Why That’s Not Easy):
“Model uncertainty is pervasive. Economists, bloggers, policymakers all have different views of how the world works and what economic policies would make it better. These views are, like it or not, models. Some people spell them out in their entirety, equations and all. Others refuse to use the word altogether, possibly out of fear of being falsified. No model is “right,” of course, but some models are worse than others, and we can have an idea of which is which by comparing their predictions with what actually happened.”
I also wrote, in that column:
If NASA suffered from comparable inaccuracy the manned spaceflight program would have been shut down by an endless series of Challenger-type catastrophes many years ago. With forecasts this bad is it any wonder the American economy continually crashes and burns?
Finally, why Mr. Valliere would wish to grant impunity to an agency — the Fed — that clearly is failing in every respect of its sloppily termed “dual mandate” is hard to discern. The Fed rather clearly is out of alignment with all three elements of its actual statutory mandate:
The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.”
Hence the appropriateness of a review.
That annoying artifact, the Constitution of the United States, at Article I section 8, vests the power in Congress “To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures….”
Congress properly has delegated the power to fix the standard of weights and measures to the National Institute of Standards and Technology. NIST is doing a truly superb job. The ounce and the inch never in history have been defined with such precision.
Thus nobody is calling for an audit of the NIST. The Fed, however, is doing a shabby job. Hence the calls for oversight.
Mr. Valliere? If I were the Fed, I too would very much wish “to stay out of the limelight.” Leading presidential contenders calling the Fed to account is long overdue. To call, as Sen. Cruz, for the Fed simply to be “focused on sound money and monetary stability, ideally tied to gold,” is far more likely to reassure than to rattle investors.
Ralph Benko, internationally published weekly columnist, co-author of The 21st Century Gold Standard, lead co-editor of the Gerald Malsbary translation from Latin to English of Copernicus’s Essay on Money, is American Principles Project’s Senior Advisor, Economics.