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We're approaching an era of 'overt politicization of monetary policy,' expert David Zervos says

Julia La Roche

Jefferies chief market strategist David Zervos on Thursday applauded former Fed vice chair Bill Dudley for having "the integrity to publicly state what has always been the ugly truth" about how politics influences monetary policy.

In a controversial opinion piece published by Bloomberg News on Tuesday, Dudley called on his former colleagues at the central bank to "refuse to play along" with Trump and his trade war on China. He added that the Fed should "explicitly state" that the central bank won't bail out "an administration that keeps making bad choices on trade policy."

"I understand and support Fed officials' desire to remain apolitical," Dudley wrote. "But Trump's ongoing attacks on Powell and on the institution have made that untenable. Central bank officials face a choice: enable the Trump administration to continue down a disastrous path of trade war escalation, or send a clear signal that if the administration does so, the president, not the Fed, will bear the risks — including the risk of losing the next election."

"There will be vehement denials by Fed officials,” Zervos wrote. “There will be congressional inquires into Fed independence. And Bill will be publicly rebuked by his ex-colleagues. But the cat is out of the bag.”

Former Fed vice chair William C. Dudley. REUTERS/Alvin Baez

"We will be soon be entering an era where the overt politicization of monetary policy will be publicly debated instead of consistently denied,” Zervos added. “I for one am happy about this turn of events. It was always difficult for me to write about what I believed were obvious political undertones to the setting of monetary policy. Whenever I did I always received angry emails from ex-colleagues at the Fed."

Senator calls for a hearing to investigate Fed independence

Dudley even made a case for why the Fed shouldn't enable Trump's policies by lowering interest rates, which would likely influence the 2020 election.

"After all, Trump's reelection arguably presents a threat to the U.S. and global economy, to the Fed's independence and its ability to achieve its employment and inflation objectives. If the goal of monetary policy is to achieve the best long-term economic outcome, then Fed officials should consider how their decisions will affect the political outcome in 2020," Dudley wrote.

U.S. Senator Thom Tillis (R-NC). REUTERS/Aaron P. Bernstein

Shortly after publication, Sen. Thom Tillis (R-NC) said he'd ask for a Senate Banking Committee hearing to investigate the Fed's independence. In a statement, Tillis criticized Dudley for "lobbying the Fed to use its authority as a political weapon against President Trump."

Zervos, who worked at the Federal Reserve during his career as both a visiting advisor in D.C. and as an economist in the early 1990s, views Dudley's move as one that adds transparency to the monetary policy determination process.

“[I]n no way am I endorsing his specific idea of creating a recession to oust Trump,” Zervos wrote. “That is an entirely different kettle of fish. I am only bringing attention to his openness on internal political motivations at the Fed to help clients make better trading decisions."

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Julia La Roche is a finance reporter at Yahoo Finance. Follow her on

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