Trump and the independence of the Fed: will the new president follow up on his campaign rhetoric?

• Author: Berry, John M.

Donald J. Trump's presidential victory has cast a dark cloud of uncertainty over the future independence of the Federal Reserve and especially its ability to protect the nation's financial system in any future crisis. The Republican-controlled House of Representatives has repeatedly passed legislation intended to force the nation's central bank to operate in a narrow, rules-based manner with a primary focus on fighting inflation even when inflation is not a threat. Other bills sought to undo many of the steps taken under the Dodd-Frank law to reduce the risk that failure of a large financial institution could endanger the financial system. None of the legislation made it through the Senate, and if any had, President Obama undoubtedly would have vetoed it.

Now the world has changed.

Late in the caustic campaign, Trump used an openly anti-Semitic television ad to attack Fed Chair Janet L. Yellen as being part of an international financial cabal of special interests supporting Hillary Clinton. He also repeatedly claimed that Yellen was "political" and that she was keeping interest rates low only to help Obama and Clinton. And like the House Republicans, Trump called for repeal of Dodd-Frank.

Yellen's four-year term as Fed chair ends early in 2018. A Trump adviser said the new president would not ask her to resign but would not reappoint her. Similarly, Fed Vice Chairman Stanley Fischer's term ends later that year. And there are already two vacancies on the seven-member Fed Board that Trump can fill.

In many ways, the attacks on the Fed have been bizarre. It used to be that politicians' loudest complaints about the Fed, often from members of both parties, came when the central bank was raising interest rates to cool off an overheated economy that was generating higher inflation--taking away the punch bowl just when the party gets going, as Fed Chairman William McChesney Martin famously put it more than half a century ago.

But in the wake of the financial crisis with Obama in the White House, something fundamental shifted: When the Fed pulled out all the stops to prevent the collapse of the U.S. financial system and bring down double-digit jobless rates, many conservatives criticized the central bank for using unconventional methods that, the critics claimed, would cause a horrendous inflation. The central bank must raise rates to head off that looming inflation and puncture expanding bubbles in asset prices, they insisted. Meanwhile, after one round of fiscal stimulus enacted while Democrats controlled Congress, conservatives demanded that federal spending also be slashed to reduce soaring budget deficits--the reverse of the normal response to a major economic slump. Then the Fed with its "misguided" policies got the blame for the slow, sometimes...