Republicans Warm to Easy Money

Conservatives who had warned of inflation during the great recession are now being forced to re-evaluate.

Source Paul Hennessy/NurPhoto via Getty

Why you should care

The GOP is softening its decades-long opposition to spending that could lead to inflation and a widening budget deficit. 

President Donald Trump’s appetite for easier money chimes with a broader shift within the Republican Party as politicians shed some of the hawkish plumage they donned in the aftermath of the Great Recession. 

The president unquestionably counts as an outlier among Republicans in demanding this month that the Federal Reserve unleash a new blast of bond-buying stimulus as well as lowering interest rates. But faced with an inflationary dog that failed to bark, and a president demanding low rates as he seeks to bolster the economy ahead of the 2020 election, Republican policymakers appear much less anxious to brandish hard-money credentials today. The shift comes as they preside over a major expansion of the budget deficit, despite past vows to control public debt.

Governing parties naturally gravitate toward lower rates as they seek re-election, and the change in mood within the broader party is in part a reflection of Trump’s ability to make the political weather, says Michael Strain, director of economic policy studies at the conservative American Enterprise Institute.

“The president is an easy-money guy. That has an effect,” he says.

Inflation is no longer the specter, and we need to think about monetary policy with a different context.

Ike Brannon, Jack Kemp Foundation

Earlier in the decade, prominent Republicans harangued then-Federal Reserve chairs Ben Bernanke and Janet Yellen, accusing them of pursuing dangerously inflationary policies. In 2011, as a contender for the Republican presidential nomination, Rick Perry, the current energy secretary, said the Fed’s quantitative easing under Mr. Bernanke was “almost treasonous.” And in 2010, Mike Pence, the future vice president, sponsored legislation seeking to strip the Fed of its employment mandate and force it to focus more on inflation.

Few Republicans were more vituperative in their attacks than Stephen Moore, the man Donald Trump now intends to nominate to join the central bank’s board of governors. He, like fellow nominee Herman Cain, is a past advocate of the gold standard, and after the crisis, he was vocal in slamming the Fed for taking inflationary risks. In 2011, when the U.S. was struggling to escape recession, he claimed monetary policy was “completely out of control,” and in 2014 he called for asset sales by the central bank in a bid to reverse QE.

Yet Moore’s now pushing for easier monetary policy, saying he does not see any inflation. The Fed should reverse what he deemed a “completely unnecessary” rate increase it executed in December that “took the wind out of the economy,” he says. 

 

Strain and other analysts think there is more afoot than simply politics. Ike Brannon, a senior fellow at the Jack Kemp Foundation in Washington, says conservatives who had warned of inflation during the great recession are now being forced to re-evaluate.

The Fed’s decisions to purchase $4.5 trillion of assets and slash rates to near-zero levels prompted countless warnings of an inflationary upsurge, yet the core measure of the Fed’s preferred inflation gauge has spent the overwhelming majority of the past decade hovering beneath the central bank’s 2 percent goal.

“Steve [Moore] has figured out like the rest of us that inflation is no longer the specter, and we need to think about monetary policy with a different context,” Brannon says. “People have learned from mistakes that were made — including by people in the GOP a decade ago.” 

The Fed’s recent decision to shelve planned rate rises and retain an outsize balance sheet compared with pre-crisis norms has accordingly sparked few objections in the Republican party. Indeed, Mike Crapo, the Republican chairman of the Senate banking committee — who previously warned of the effects of long periods of low rates — last week swung behind a rate reduction.

Alabama Sen. Richard Shelby was among the Republicans who opposed Yellen’s nomination to be Fed chair five years ago because he believed she was displaying a bias toward inflation and backed QE. In February, however, Shelby lavished praise on Jay Powell, Yellen’s successor, saying it was “the best economy I’ve seen in my lifetime.”

As he spoke, the Fed’s balance sheet still stood at nearly $4 trillion, and Powell was signaling that it would remain well over three times its pre-crisis scale in nominal terms, even after the Fed finishes paring it back. At the same hearing, Patrick Toomey of Pennsylvania was the only Republican member of the Senate banking committee to raise concerns about a potential overhaul of the Fed’s inflation target under which the central bank could sometimes shoot for higher-than-target inflation.

In earlier times, such a policy might have prompted far more anxiety among inflation hawks. But are there limits to this pivot? Despite their more dovish posture, Republicans are by no means entirely comfortable with Trump’s attempts to publicly put pressure on the Fed to lower rates.

Trump’s decision to propose two political loyalists to the Fed board has triggered anxiety as some lawmakers fret the central bank’s independence could be damaged. Cain’s prospects are looking more doubtful following skeptical comments from senior Republicans. For his part, Moore has distanced himself from Trump’s call for more QE, arguing such a move did not make a lot of sense now. He has also played down the extent to which he had changed his personal views on monetary policy, arguing his principal objection to QE had not been that it would boost inflation, but that it would fail to stimulate the economy. 

Yet Doug Holtz-Eakin, who advised the late John McCain’s presidential campaign, says the post-crisis experience had been a salutary one for conservatives. “Inflation dynamics are not what they used to be,” he says.

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By Sam Fleming

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