There’s a big vote coming up this year, one that could change the course of the American economy.
No, we’re not talking about the presidential election. (Though we’ll get to that in a moment.) We’re talking about the Federal Reserve, the institution that sets the influential interest rate that affects how much you pay for a credit card, a car or a home.
On Tuesday and Wednesday, top officials from the nation’s central bank will convene in Washington to debate whether to keep raising that rate, which is now just about a quarter of a percent. It’s an important decision because moving too fast could derail the progress the U.S. recovery has made so far. But if the Fed waits too long, it risks allowing the economy to overheat -- which could then require it to play a dangerous game of catch-up.
Most investors believe the central bank will hold off on raising rates this week, though it could still move later this year. Either way, the Fed will make the decision independently: It is an apolitical institution that is supposed to operate free from partisan pressure and ideology.
But there are political ramifications to its decisions. A strong economy tends to boost the party currently in power, which is why President Nixon installed confidante Arthur Burns as head of the Fed in 1970, urging him to keep interest rates low to stoke the job market. The result was a decade of runaway inflation that was tamed only by a painful recession.
More recently, the Fed has expanded the scope of its powers to combat the 2008 financial crisis -- and that is making some presidential hopefuls uneasy. Texas Sen. Ted Cruz wants to audit the Fed. Vermont Sen. Bernie Sanders believes the central bank has been “hijacked” by, well, bankers. Marco Rubio called it a "special Jedi Council." (Or should that be "Fed-i Council?")
The Fed’s debate over whether to raise interest rates will continue well into the heart of the campaign cycle, likely providing even more fodder for candidates on the trail. Here’s a rundown of where they stand now:
“Janet Yellen for political reasons is keeping interest rates so low that the next guy or person who takes over as president could have a real problem.”
The billionaire mogul made that statement to Bloomberg TV in an interview back in October. He warned that raising rates could spark a recession, but also said that the Fed had stoked a bubble by keeping interest rates low for too long.
Then, in an interesting twist last month, Trump used the Fed to attack Cruz:
It is so important to audit The Federal Reserve, and yet Ted Cruz missed the vote on the bill that would allow this to be done.
— Donald J. Trump (@realDonaldTrump) February 22, 2016
Audit the Fed is the shorthand for congressional proposal that would subject the Fed to regular audits by the Government Accountability Office. It would also require the central bank to publicize the mathematical rules it uses to set interest rates and explain when it deviates from them, among other things. The bill passed the House in November but stood little chance in the Senate, especially after the White House threatened to veto the proposal. The Fed has been adamantly opposed to what it views as a misguided effort to limit its powers.
Cruz has long supported greater scrutiny of the Fed, but when the Senate voted on the measure in January, he was absent. That prompted conservative radio host Glenn Beck to press for answers and he posted Cruz’s response on Facebook.
"I strongly support auditing the Fed. Indeed, I was an original co-sponsor of Ron Paul's Audit the Fed bill. Unfortunately, it was clear early on that yesterday's vote wasn't going to succeed (it fell 7 votes short). And, at the same time that the vote was scheduled, I had longstanding commitments to be in New Hampshire -- for a Second Amendment rally, and a 1500- person State of the Union town hall. If my vote would have made a difference in it passing, I would have cancelled my campaign events to be there. Because the vote was not going to succeed, I honored my commitments to be with the men and women of New Hampshire.
As President, I look forward to signing Audit the Fed legislation into law."
All this talk of the Fed’s powers may give too much credit to the central bank. In a CNN town hall debate last month, Rubio tried to clear up the facts -- except, of course, that it is the Fed’s job to stimulate the economy. The rest of his statement was accurate.
"Well first of all, let me just address the Fed issue, Douglas. That’s not the Fed’s job to stimulate the economy. The Fed is a central bank, it is not some sort of overlord of the economy. They’re not some sort of special Jedi Council that can decide the best things for us."
In addition to acting as the steward of the nation’s economy, the Fed also regulates the country’s biggest banks. Sanders challenged the Fed on both of those responsibilities in a New York Times op-ed published in December. He criticized the central bank’s decision to raise interest rates last year for the first time since the Great Recession, arguing that it should’ve waited until the unemployment rate fell below 4 percent. Sanders also advocated reforming the institution’s complicated governance structure as a first step toward reining in Wall Street.
"The sad reality is that the Federal Reserve doesn’t regulate Wall Street; Wall Street regulates the Fed. It’s time to make banking work for the productive economy and for all Americans, not just a handful of wealthy speculators. And it begins by making the Federal Reserve a more democratic institution, one that is responsive to the needs of ordinary Americans rather than the billionaires on Wall Street."
She hasn’t had much to say about the central bank, but she did offer this response to the Fed’s decision to raise interest rates last year:
"The Fed has been signaling this for a very long time if they do make this decision by the end of the year ... I think the markets in the U.S. and the world will have already processed that and they have laid out what criteria they think should be applied."
Perhaps more notable was the revelation last week that one of the Fed’s top officials, Lael Brainard, donated $750 to Clinton’s campaign. The contribution did not violate any rules, but several Republican lawmakers said it raises questions about the Fed’s own independence. Brainard’s husband was a top adviser to Clinton when she was Secretary of State, and Brainard served at the Treasury Department before heading to the central bank. No one else in the Fed’s top brass has made a political donation while in office, according to federal records.