Rogoff Says Markets Will Thwart Any Political Pressure on Fed

(Bloomberg) -- Harvard University economics professor Kenneth Rogoff said that financial markets would effectively impose restraint on any move by a US president to force the Federal Reserve into easing monetary policy.

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“If you take away Fed independence, investors are going to get jittery, inflation expectations are going to go up, the dollar’s going to tank,” Rogoff said on Bloomberg Television’s Wall Street Week with David Westin. “For better or for worse, maybe, I think markets will throw a pretty cold bucket of water on the president if he tries to do that.”

With the Fed for now pledging to keep interest rates at the highest level in decades, investors have been eyeing speculation that former President Donald Trump might seek to force policymakers into cutting their benchmark should he win November’s election. Rogoff noted that there are also progressive Democrats who have tried to pressure the Fed into easing.

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“Almost no matter who’s in power, they’re looking for ways to try to loosen monetary policy,” Rogoff said. “The progressives have ideas for taking away Fed independence too. They’re not at the tip of the tongue of President Biden or Jared Bernstein and his advisers, but they are ideas floating out there.”

Bernstein, who heads President Joe Biden’s Council of Economic Advisers, last week highlighted the importance of shielding the Fed from politics. “I can spend a long time talking to you about economies that have been brought to their knees when the independence of the central bank has been compromised,” he said.

Rogoff, a former International Monetary Fund chief economist, also said that political influence will be difficult for the Fed to reject in its entirety.

“Of course the Fed’s heart is in the right place, but it’s hard to be an island of technocratic tranquility in the middle of a sea of political turmoil,” he said.

Rogoff also said he expects long-term interest rates to remain elevated for years to come. Ten-year Treasury yields are currently around 4.68%, compared with an average of 2.36% over the past decade.

“Long-term interest rates are probably higher for as far as the eye can see,” Rogoff said. “Even after the Fed unwinds its interest-rate hikes, I think they’re going to stay higher for a very long time.”

He pointed to fiscal deficits and a slowdown, or possible reversal, in the globalization of supply chains putting pressure on long-term rates. He also anticipated some pressure on short-term rates as well — speaking a day before the Federal Reserve’s latest policy announcement. The Fed is widely expected to leave its key rate unchanged at the highest level in more two decades.

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When asked about the impact of higher rates over the longer haul on economic growth, Rogoff indicated that would depend on the reason for the increase in borrowing costs.

“To the extent it’s driven by huge government borrowing, private borrowing, it’s clearly a negative — you’re just paying a risk premium to borrow,” Rogoff said. But higher rates could also be a consequence of stronger investment in technologies including artificial intelligence that yield productivity gains, he said. The future may have an element of both those dynamics, he said.

(Updates with comment on economic impact in final paragraph.)

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