Henry Kaufman has a great op-ed in the Wall Street Journal this morning in which he expresses his near-term fears about a politicized Federal Reserve.
In the course of making his case that some political involvement in monetary policy is probably unavoidable, he gives us a quick history lesson on how US Presidents have historically dealt with Fed Chairmen:
Still, past presidents have hardly been effective at controlling their Fed chairmen. Bill Martin, who served as Fed chairman from 1951 to 1970, was called a “traitor” by Harry Truman when U.S. Treasury financing costs increased as a result of measures supported by Martin allowing Treasury obligations to be traded at market-determined levels.
In 1965, after the Fed raised rates, Martin was summoned to Lyndon Johnson’s Texas ranch where the disgruntled president reportedly said to him, among other things, “You took advantage of me and I just want you to know that it’s a despicable thing to do.” Journalists referred to this episode as “a trip to the woodshed.”
One of the most striking examples of Fed chairman nonpartisan independence was Paul Volcker’s eventful tenure during the Jimmy Carter administration. I doubt the Democratic president fully anticipated how Mr. Volcker would wring hyperinflation out of the economy by raising interest rates to unprecedented heights. It was a correct and effective action, but it earned Mr. Volcker few friends within the business and financial community.