The danger, then, is that the Fed will be tempted to cut rates as a result of external pressure, on the assumption that it can always rationalize cuts by pointing to variables that seemed to augur a growth slowdown sometime in the future. It is telling that Powell has not mentioned (at least that I have heard) the fact that the nominal and real federal funds rates remain well below long-term normal values. (This deviation is even more apparent for interest rates in some other advanced countries, such as Germany and Japan.)
The desire to restore normalcy should still be putting upward pressure on rates, just as it did during the period of rate increases between December 2016 and December 2018. Indeed, it was Bernanke’s earlier failure to initiate the normalization process that made things more difficult than necessary for Yellen and Powell.
My view is that the shift in 2019 away from normalization is primarily due to the intense opposition to further rate increases last December, when the loudest objections came, notably, from stock-market analysts and the Trump administration.
The entire point of central-bank independence is to establish a credible monetary policy by insulating the relevant decision-makers from such influence. That is what we learned from the early 1980s, when Fed Chair Paul Volcker hiked the federal funds rate up to the level necessary to choke off inflation. The big difference, of course, is that President Ronald Reagan supported Volcker, whereas Trump is Powell’s chief antagonist.
Powell’s challenge, then, is to maintain Volckerian discipline and independence in the face of growing political pressure. At the moment, his prospects for success are not great.
Robert J. Barro is professor of economics at Harvard University and a visiting scholar at the American Enterprise Institute. He is co-author (with Rachel M. McCleary) of "The Wealth of Religions: The Political Economy of Believing and Belonging."