Happier times: Trump with Fed chairman Jerome Powell.
Photo: Olivier Douliery/Bloomberg via Getty Images
Since President Trump is mad again about the Federal Reserve raising interest rates, it seems like a good time to review all the things Trump has done that tend to cause the Federal Reserve to raise interest rates.
- Trump has appointed people to the Federal Reserve Board who favor higher rates. This is the big one. His own people are making these choices! Trump’s Fed picks have fallen into two camps. One, led by Chairman Jerome Powell, operates in the mold of Janet Yellen and Ben Bernanke, taking a balanced view of unemployment and inflation that tends to call for modestly rising interest rates in economic conditions like those that prevail today. I think this is a smart view — I largely agree with these folks on monetary policy! But Trump does not. And yet he picked them. The other camp is represented by Marvin Goodfriend. In 2016, Goodfriend warned the Fed’s failure to raise rates constituted “financial anarchy.” Sad!
- Trump has pursued fiscal policies that will tend to push the Fed toward higher rates. Trump has used fiscal policy to stimulate the economy. The most obvious example of this is Republicans’ big, deficit-financed tax cut, but Trump has also signed spending bills that gave Democrats increases in non-defense spending in exchange for defense spending hikes Republicans wanted. That, obviously, also grows the deficit. In a recession, deficit spending can be useful for reducing unemployment — the government spends when individuals cannot. But if you do this when the economy is strong, you will tend to push up inflation. You can expect the Fed to fight that expected inflation by raising interest rates.
- Trump has boxed the Fed into higher rates by openly calling for lower rates. The “presidents don’t talk about monetary policy” norm doesn’t exist for the benefit of the president’s opponents. The norm isn’t even that old — it’s a practice that dates back to the Clinton administration, and it was adopted because of the perception that George H.W. Bush’s open complaints that interest rates were too high had backfired, making the Fed less inclined to cut. The Fed governors cherish the market’s perception that the Fed is independent, because the Fed only directly controls short-term interest rates. To influence long-term interest rates, the Fed needs to be able to make credible claims today about what short-term interest rate polices it will set in the future. If the Fed appears to do whatever the president tells it to do, it will lose that credibility. So if the president openly attacks Fed policy, he is likely only to entrench that policy.
If Trump dislikes the Fed’s policies, he should talk less about it and make more appointments of people who agree with his critiques. If he can find any.
