UMD Study: Presidential Pressure on Fed Boosts Inflation Down the Road

In politicians, a relentless pursuit of what they believe is best for their constituents is generally seen as a good thing. But that pro can become a con—and lead to a measurable increase in the nation’s inflation rate—when it involves a president of the United States pressuring the Federal Reserve to lower interest rates, according to a new study from a University of Maryland economist.

Assistant Professor Thomas Drechsel’s analysis, published recently in a Centre for Economic Policy Research discussion paper, was based in part on the archived daily schedules of presidents from 1933 to 2016. While former President Donald Trump’s (as well as President Joe Biden’s) daily schedules have not yet been publicized under federal records rules, Drechsel’s paper starts with a reference to research about Trump—seeking reelection this year—to push the Fed to make money easier to borrow prior to the 2020 vote.

For example, as he shows in the paper, the political pressure on the Fed that former President Richard Nixon applied in 1971, when he met with officials there 34 times, led to an estimated estimated price level increase of 16% over the following decade.

Officials at the Fed—the nation’s central bank—are appointed rather than elected by design, Drechsel said. Although the Fed is intended to operate without taking politics into consideration, that mission hasn’t always been upheld.

“In some sense, it’s an undemocratic institution and that is by design, because you don’t want the Fed to bend against public opinion. They have to do their job, even if it’s unpopular,” said Drechsel. “That means that if voters vote for a president who exerts their influence on the Fed, that’s going to have enormous consequences.”

Using the daily schedules, he studied presidents’ interactions with Fed officials. Some of those records were archived digitally, but some, like those of former President George H.W. Bush, were only available for in-person viewing. Research assistant and economics doctoral candidate Ko Miura traveled to College Station, Texas to manually go through the daily schedule records kept in the George H.W. Bush Presidential Library and Museum.

"I spent one week there photographing pages for five days, six hours per day," said Miura. "It was worth the time and effort not only because I am personally interested in this topic—I actually worked at Japan's central bank prior to enrolling at UMD—but also because this project uses new data and a state-of-the-art statistical technique to answer a very important research question."

Drechsel found more than 800 interactions in total, with great variation in the number of interactions each president had with the Fed. Nixon interacted with the Fed 160 times over his five years as president, for example, whereas Bill Clinton clocked only six interactions during eight years.

Drechsel accounted for the possibility that some interactions were unrelated to presidential pressure, and also considered other factors that might influence inflation, like fiscal policy, technological progress and international developments.

The approach’s quantitative measure of political pressure lined up with qualitative evidence of political pressure Drechsel was also able to obtain from press reports and even personal documents like the diary of Nixon-era Fed Chair Arthur Burns’ own diary.

“In the 1960s and ’70s, presidents putting pressure on the Fed led to inflation and inflation expectations to increase, which means that inflation becomes very entrenched,” said Drechsel. “I understand that there are many other important things at stake in this election, and I can see why a president’s potential pressure on the Fed may not be high on that list, but I do think this should be viewed as a more important issue than it currently is.”

Drechsel also observed political pressure on the Fed during the Obama administration, although it was less than that in earlier decades. It would be unsurprising, Drechsel said, to see an increase in political pressure in an eventual analysis of Trump’s first term, noting existing research that shows his commentary on Twitter had an economic impact.