Vivek Ramaswamy Takes on the Fed The role of the central bank in our economy is a presidential-level issue.
Vivek Ramaswamy may be a longshot in his bid for the GOP presidential nomination, but the entrepreneur deserves credit for taking on issues that matter. His op-ed for these pages on Tuesday teed up reform of the Federal Reserve, a presidential-level issue that affects every American.
Most candidates haven’t done enough homework to talk about the Fed or monetary policy without looking foolish. And even for those who have, the conventional political wisdom is that the subjects are too complicated to grab public attention.
Yet that hasn’t always been true. Ronald Reagan campaigned on the need for a stable dollar, and the late Congressman Jack Kemp talked about making the dollar “as good as gold.” Those lines struck a populist chord as Americans faced the destructive inflation of the 1970s and the painful monetary tightening to defeat it in the 1980s. The U.S. is back at that same stand, with Washington having unleashed another inflation and the Fed now scrambling to beat it. Bank failures are one result.
Mr. Ramaswamy’s helpful contribution was to trace the Fed’s monetary mistakes back to the central bank’s loss of focus on keeping the dollar and exchange rates stable. That was the lesson Paul Volcker and other central bankers took away from the inflation of the 1970s, and their focus on stable prices led to more than a decade of healthy disinflation. It was called “the great moderation.”
But Fed governors later lost the plot, notably in the mid-2000s under Chairman Alan Greenspan, with the support of then Governor and later Chairman Ben Bernanke. Fearing a chimera called “deflation,” they kept interest rates too low for too long, producing an asset mania that eventually turned to panic and then a crash when the Fed inevitably tightened. The Fed and the political class blamed bankers for the financial crisis of 2008, but Mr. Ramaswamy is right that the central bank was the biggest culprit.
Mr. Bernanke then led the Fed into uncharted monetary territory with near-zero interest rates for years, bond-buying to keep even long-term interest rates low, and political interventions in housing and other markets. Some of this was necessary in 2008 and the early days of Covid, but the Fed didn’t know when to quit. The result has been the return of inflation.
Mr. Ramaswamy has it right with his focus on maintaining a stable dollar. That is supposed to be the Fed’s job, but in recent decades it has measured success based on the job market or inflation measures that are prone to measurement errors and ignore asset bubbles. This helps explain why the Fed constantly undershoots or overshoots in its policies and inflicts substantial collateral damage.
Mr. Ramaswamy’s proposal instead would be for the Fed to focus more directly on dollar stability with reference to a basket of commodities. This would be easier to track in real-time and also would help the dollar become a stable basis for global trade again.
This is an economic debate that deserves to be part of the presidential campaign. Florida Gov. Ron DeSantis has also criticized the Fed, though so far without Mr. Ramaswamy’s specificity. Perhaps he will get there. The issue sets them apart from Donald Trump, who is an easy-money man and appointed Fed Chairman Jerome Powell. If Mr. Ramaswamy doesn’t get the GOP presidential nod, the nominee should keep him in mind to run Treasury.
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