Precedents for Obama to Address Monetary Policy

Authored By 
Patrick O'Brien
Blog contributor 
Policy Fellow

Before the end of the month, Fed Chairman Janet Yellen will present her semiannual monetary report to Congress and in March the Federal Open Market Committee (FOMC) will hold its next two-day policy meeting. Both events will be watched closely to see whether, as is now expected, the Fed will move to increase interest rates in June or later this year. And the pressure to do so has only increased following the most recent jobs report, with the last three months marking the best performance since 1997.

Interestingly, no one is talking about the president’s position on the potential interest rate increase, almost certainly because the president himself has not addressed the issue. Although Obama prominently discussed taxation in his recent State of the Union, there was not a single reference to the equally significant issue of interest rates. More significantly, the president has hardly mentioned monetary policy at all during his six years in office. Why is he so hands-off when it comes to this important subject? The conventional answer is that monetary policy is managed by an independent agency and presidential influence extends no further than the appointment power. Yet this answer falls short if we look back at some of Obama’s Democratic predecessors.

Consider, for example, Franklin Roosevelt and Harry Truman. The modern Fed was established in 1935 during Roosevelt’s first term, though only after the president had already devalued the dollar by roughly forty percent. While originally looking for a new Fed chair, Roosevelt pushed back against standard practices, commenting that he did “not want anyone in that job who has a passion for banking!” Instead, he was searching for someone with new ideas and ultimately appointed Marriner Eccles, an unorthodox Utah banker and leading advocate of deficit spending who emphasized the limitations of monetary policy. “I realize that without a properly managed plan of government expenditures and without a system of taxation conducive to a more equitable distribution of income,” Eccles explained, “monetary control is not capable of preventing booms and depressions.”

When Eccles and the Fed later grew worried about inflation as the Second World War escalated, Roosevelt commented to his Treasury secretary, “Henry, … the Federal Reserve System is so unimportant nobody believes anything that Marriner Eccles says or pays any attention to him.” Indeed, throughout his presidency, Roosevelt and the Treasury Department took the lead in setting monetary policy while the Fed, as Allan Meltzer has described it, remained “in the backseat” from 1933 to 1941 and “under Treasury control” from 1942 to 1951.

Following Roosevelt’s example, Truman opposed the Fed’s independence after the war and went so far as to invite the entire FOMC to meet with him at the White House in an attempt to settle the issue on his own terms. The next day the administration issued a public statement falsely announcing – to put it nicely – that the Fed had “pledged its support to President Truman” and would leave interest rates fixed. It proved to be the first and only meeting of its kind, as Fed officials were furious and continued to battle with the president and the Treasury.

Ultimately, the Treasury-Fed Accord of 1951 granted the Fed its independence. Yet Truman still attempted to maintain control over monetary policy, informing Fed Chairman Thomas McCabe that “his services were no longer satisfactory” and appointing William McChesney Martin, Jr, in his place. Martin, who had actually negotiated the accord with the Fed, was the assistant secretary of the Treasury at the time and therefore viewed as loyal to the president. The hope was that he would implement the accord on terms favorable to the administration. However, once it was evident that Martin also supported an independent Fed, the president turned on him as well. The chairman later described his next encounter with Truman: “I said ‘Good afternoon Mr. President.’ The president looked me right in the eye and said only one word in reply, ‘Traitor!’ ”

From an historical perspective, it is striking that presidents today accept the idea of an independent Fed managing monetary policy as given. While Roosevelt and Truman did not win every battle with the Fed, their actions certainly influenced monetary policy and helped keep attention on unemployment and economic growth rather than inflation. Certainly, there are significant differences between the 1930s and 1940s and the present. The point, however, is simply that there are precedents for Obama to focus on monetary policy. And so as the Fed continues to discuss raising interest rates as we approach the “natural rate” of unemployment – a rate that no one actually knows but the Fed estimates to be between 5.2% and 5.5% – the president should, at minimum, consider joining the conversation if he is concerned more about economic growth and unemployment than inflation.

Patrick R. O’Brien is an ISPS Graduate Policy Fellow and a PhD student in the Political Science department at Yale.