One has to pity Federal Reserve Chair Janet Yellen. Even under normal circumstances, it would be difficult for her to successfully manage the process of regularizing U.S. interest rates from their currently ultra-low levels. However, after this year's highly divisive presidential election campaign, there is the real risk that U.S. politics will be anything but normal over the next few years.
Prior to the heating-up of the presidential election campaign, Yellen was already increasingly being criticized by a Republican-dominated Congress for her conduct of monetary policy. In particular, she was charged with unduly expanding the Federal Reserve's balance sheet and keeping interest rates low with a view to benefiting Wall Street rather than Main Street. This criticism played well with an electorate which feels that it has been unfairly left behind in the current U.S. economic recovery and which resents being forced to receive such derisively low interest rates on its savings.
As a forewarning of how Yellen's position could further deteriorate after Jan. 20, 2017, GOP nominee Donald TrumpDonald TrumpFormer defense secretary Esper sues Pentagon in memoir dispute Biden celebrates start of Hanukkah Fauci says lies, threats are 'noise' MORE took an unprecedented step for a major party's presidential nominee and launched a full-throated attack on Federal Reserve independence. He charged that Yellen was keeping interest rates unusually low in order to artificially prop up the U.S. economy and make President Obama's economic legacy look good. He added that he would certainly not reappoint Yellen when her term expired. In so doing, Trump seemed to reveal how little regard he has for the independence of U.S. institutions and how tenuous Yellen's position might become were he to be president.
The sad reality for Yellen is that, whoever might win the White House, a fractious Congress is almost certain to remain controlled by the Republicans. Such a Congress is all too likely to pander to public resentment about the uneven nature of the U.S. economic recovery and continue to challenge the Federal Reserve's independence. In those circumstances, in the event that the U.S. economy were for any reason to stumble, Yellen would have the greatest of difficulty in generating support for yet another round of quantitative easing. Needless to add, she would have even greater difficulty in winning support for more radical policies like negative interest rates or helicopter money.
An even greater challenge to Yellen might come from the sort of economic policies being espoused by both candidates with respect to trade policy and the budget. While there can be no doubt that Trump has been very much more radical on the issues than Democratic nominee Hillary ClintonHillary Diane Rodham ClintonCountering the ongoing Republican delusion Republicans seem set to win the midterms — unless they defeat themselves Poll: Democracy is under attack, and more violence may be the future MORE has been, both candidates are questioning the merits of globalization and both seem to be much more relaxed about the need for budget discipline than has been Obama.
Unlike Supreme Court Justice Ruth Bader Ginsburg, Yellen is sensible enough not to publicly express her political preference in this year's presidential election. However, judging by three of Trump's more radical policy positions, one would be surprised if she did not have a clear preference for having Clinton in the White House.
The first of those positions is Trump's highly mercantilist approach to U.S. trade policy and his commitment to take retaliatory measures against countries like China that run large trade surpluses with the United States as well as to tear up international trade agreements. The second is his proposal to dramatically cut taxes — by over $4 trillion over the next decade, by his own estimates — on the premise that a pick-up in U.S. economic growth to 3.5 percent a year will keep the budget deficit in check. The third is his strong stand on immigration policy that could seriously jeopardize relations with Mexico, a major U.S. trade partner.
Yellen must fear that a very aggressive U.S. policy stance on trade issues could risk destabilizing global financial markets, particularly at a time when the world economy is characterized by so many fault lines and is drowning in debt. She must also fear that large tax cuts made on the premise that U.S. economic growth would pick up could risk causing the budget deficit to blow out again, much as it did in the 1980s when similar such policies were pursued by President Regan.
One has to hope that, after the election, whoever moves into the White House will soon back off from the more radical economic policy proposals made during the election campaign. For now would seem to be a particularly inauspicious time to rock the global economy, especially considering that the Federal Reserve has exhausted much of its monetary policy arsenal.
Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.
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