The Power of Appointment
Analogous to the Supreme Court, control of Federal Reserve appointments provides an avenue for Presidential influence over monetary policy. However, the President’s choices for Reserve Board members are constrained by the need for Senate approval and legal precedent. The requirement in the Federal Reserve Act of 1913 (reaffirmed in the Federal Reserve Reform Act of 1978) for sectoral representation on the directorates of Reserve Banks has also come to influence Board appointments.
Appointees fell into two broad categories. Reliable partisans, whose monetary policy preferences are firm, cannot meet representational demands of any valuable political constituencies. And representational appointees, who satisfy those demands, but whose preference cannot be counted on. The Presidential choice of representational or reliable will depend on the relative benefits.
The political return on representational appointees is large because they please key constituencies, but their risk is large because they can interfere with the macroeconomic policy goals of the administration. Game theory would dictate the President should choose reliable appointees relatively further away from an election. This is borne out in the data as Presidents choose partisan appointees ten months earlier into the start of their term on average than representational appointees.
The Federal Reserve enjoys significant legal independence and has built itself significant credibility in the decades since inflation was last a problem. Those factors served as substantial bulwarks against a rising tide of political interference in monetary policy, but all structures have a breaking point. When economic conditions breach an unobservable but very real “pain threshold” the whole notion of rules-based monetary policy goes right out the window and de facto independence declines as political interference becomes an issue the central bank cannot avoid. The recent events in the banking sector provided a perfect example.
This series of notes will examine the Great Inflation from an economic and political vantage point, providing key insights to investors about how to navigate the inflationary equilibrium developing in the present day.
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