Presidents Vs. The Fed: We've Been Here Before

Fed Chairman William McChesney Martin is a towering figure in the nation’s financial history, in part because of his long service in the role during the terms of five presidents from Truman to Nixon.

But on a December day in 1965, when he was summoned to President Lyndon B. Johnson’s Texas ranch, it was Johnson who loomed over Martin.

And what was supposed to be a fiscal meeting became a physical meeting.

Johnson had a heated confrontation with Martin over the Fed chair's push to raise rates in what now looks like a forerunner of the sort of feud that President Donald Trump is having with Fed Chairman Jerome Powell.

With Trump blaming the Fed for halting economic growth and roiling markets, it’s worth a look back at other presidents and their history with the Fed.

A 'Very Disagreeable' Johnson

A couple days before the 1965 standoff at Johnson’s ranch, Martin had led the Fed in increasing the discount rate for the first time in about a half decade of steady economic growth. Increased government spending on domestic “Great Society” programs and the war in Vietnam, as well as a 1964 tax cut, had spurred the economy — and Martin and the Fed were worried about inflation.

Johnson was furious, worried that higher rates would endanger his so-called War on Poverty.

“You’ve got me in a position where you can run a rapier into me and you’ve done it,” Johnson snarled at Martin, according to Robert Bremner's book “Chairman of the Fed.” Bremner writes LBJ had earlier told Martin the Fed should delay the rate increase and was ignored.

Johnson asked aides: “how can I run the country and the government if I have to read on a news-service ticker that Bill Martin is going to run his own economy?” according to a later New York Times account of the clash.

According to the Times, “Johnson reportedly shoved Martin against the wall” as he expressed his displeasure in the Fed’s independence.  

“Boys are dying in Vietnam and Bill Martin doesn’t care,” Johnson supposedly told Martin, though the Times the next day on its front page would call it an “amiable confrontation.”

“He was very disagreeable,” Martin would say later with some understatement in an oral history archived at the LBJ Library.

Martin’s standing up to Johnson’s bullying wasn’t the first time a Fed chairman had a rocky relationship with the White House.

'Presidents Have Been Pressuring The Fed Since Its Creation' 

In the early 1950s, President Harry Truman and his Treasury Department battled the Fed under Chairman Thomas McCabe over treasury yields just as the Cold War was beginning, with Truman writing to McCabe that if he lifted a cap on bond yields, he’d be doing “exactly what (Russian Premier Joseph) Stalin wants.”

While McCabe hammered out an agreement that is widely considered to have set the precedent for Fed independence, he still was forced to resign, to be replaced by Martin.

It was just one instance in a long line of presidents leaning, though usually more metaphorically, on their Fed chairmen, former Congressman Ron Paul said in a column this past summer.

“President Warren Harding called on the Fed to lower rates,” Paul said. “Richard Nixon was caught on tape joking with then-Fed chair Arthur Burns about Fed independence. And Lloyd Bentsen, President Bill Clinton’s first Treasury secretary, bragged about a 'gentleman’s agreement' with then-Fed Chairman Alan Greenspan.”

Some economists say Burns was afraid of angering Nixon and essentially followed the White House’s wishes on rates ahead of the 1972 election.

Former Chairman Paul Volcker said in a new memoir that President Ronald Reagan’s Chief Of Staff James Baker — with Reagan sitting quietly beside them in the White House library — said the president “is ordering you not to raise interest rates before the [1984] election.”

Volcker said he hadn’t been planning to anyway. But, Volcker wrote, he was stunned.

“I later surmised that the library location had been chosen because, unlike the Oval Office, it probably lacked a taping system.”

While Trump’s critics may believe he is in uncharted territory with the way he’s conducted himself in the Oval Office, his efforts to pressure Powell aren’t really that different than most of his predecessors.

“History is full of cases where presidents pressured the Federal Reserve to adopt policies compatible with the presidents’ agendas — and helpful to their reelection campaigns,” wrote former Congressman Paul. “Presidents have been pressuring the Fed since its creation.”

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Photo: President Donald Trump announces Jerome Powell's nomination for chairman of the Federal Reserve board of governors on Nov. 2, 2017. White House photo by Andrea Hanks.