Published On: Fri, Oct 12th, 2018

Donald Trump’s Loco Attack on the Federal Reserve

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Is the Fed loco? That was one of the first questions Larry Kudlow, the former CNBC host who now serves as the head of the National Economic Council at the White House, received on Thursday morning, when he gave an interview to some of his former colleagues. “Is the Fed who?” Kudlow replied with a smile.

Hours earlier, Kudlow’s boss, Donald Trump, had doubled down on his claim that the Federal Reserve, a government agency that is meant to operate independently while ultimately being responsible to Congress, “has gone crazy.” Trump made this remark on Wednesday afternoon, blaming the Fed’s policy of gradually raising interest rates for a slump in the stock market. (The Dow Jones Industrial Average closed down more than eight hundred points.) That evening, in an interview with Fox News’s Shannon Bream, Trump returned to the theme, saying, “The Fed is going loco and there’s no reason for them to do it.” On Thursday morning, as stocks were falling again, he lashed into the Fed for a third time, averring that it was “out of control.” When a reporter asked Trump if he was going to fire Jerome Powell, the former investment banker he appointed as Fed chairman earlier this year, he replied, “No, I am not going to fire him.”

Tensions between the White House and the Fed are far from unknown, especially in election years. In 1984, James Baker, Ronald Reagan’s chief of staff, tried (and failed) to extract an assurance from Paul Volcker, who was then the Fed chairman, that he wouldn’t raise interest rates. After the 1992 election, some former members of George H. W. Bush’s Administration blamed Alan Greenspan’s failure to cut interest rates for Bush’s loss. Traditionally, though, senior administration officials, and especially Presidents, have shied away from publicly criticizing the Fed, preferring to exercise their influence quietly or by appointing to the Fed’s board people who share their views.

Trump doesn’t give a fig about Presidential norms, of course. Having tried to claim personal credit for the stock market’s rise on many occasions during the past year and a half, he is clearly desperate to shift the blame for a dive in the Dow, even though such an eventuality was virtually inevitable at some point because stock prices have risen so far over the past few years. Trump also doesn’t seem to have much respect for the Fed’s independence. If one of the consequences of his attacks is to undermine confidence in an institution that celebrated its centenary in 2013, so be it. Apparently, that’s fine by him.

To be sure, Trump’s contempt for the established institutions of government isn’t anything new. We have seen it in his attacks on the Justice Department, the intelligence services, and the F.B.I.; in his decision to bring his daughter and son-in-law into the White House; in his statement that the denuding of the ranks at the State Department was of no concern because “I’m the only one that matters.” Until pretty recently, however, he had left the Fed alone. Indeed, he said only complimentary things about Powell’s predecessor, Janet Yellen, whose term of office ended in January.

What has irked Trump of late is the Fed’s decision to raise the federal-funds rate, a short-term interest rate it controls, three times already this year, and its signalling that it is likely to announce more rate hikes in December and in 2019. As Trump explained on Thursday, he thinks the Fed is being “too stringent, far too fast.”

As it happens, he isn’t the only one of this opinion. “I think he’s got a point here,” Dean Baker, a senior economist at the liberal-leaning Center for Economic and Policy Research, told me on Thursday, referring to Trump. For some time now, Baker has been arguing that the Fed is moving prematurely and endangering a recovery that is finally delivering tangible benefits to working families. “Are we really seeing the evidence of accelerating inflation that would warrant this?” Baker said. “No, we aren’t.”

The Fed’s preferred measure of the core rate of inflation in the U.S., which excludes volatile items like food and energy prices, currently stands around the Fed’s target of two per cent. If you set aside housing costs, it is just 1.4 per cent, Baker pointed out. And if you look at wage inflation, he added, it has risen, from about 2.5 per cent, a couple of years ago, to 2.9 per cent now, a very modest move. “No one could pretend with a straight face that this is getting out of whack,” Baker said. “The idea that we are about to see wage price spiral is ridiculous.” Instead of taking preëmptive action against a threat that, so far, has failed to materialize, the Fed should pause its rate hikes, at least for a period, Baker argued. “If inflation starts to pick up, then we raise rates,” he said. “The wait-and-see approach just seems much more sensible when we don’t see any evidence of inflation.”

But many economists and financial commentators believe that the Fed, which kept the funds rate close to zero for almost a decade to help the economy recover from the Great Recession, is doing the right thing now in gradually tightening monetary policy. For the past six months, the economy has been growing at a rate of about four per cent, and the unemployment rate stands at just 3.7 per cent, its lowest rate since the nineteen-sixties. Yet even after the Fed’s latest rate hike, the funds rate stands at only 2.25 per cent, a low rate by historic standards. “I think the Fed is doing what it needs to do in a very strong economy. So, the economy is growing at an unsustainable pace,” Don Kohn, a former vice-chairman of the Fed, said on CNBC on Thursday. With employment expanding at a monthly rate of roughly two hundred thousand and the labor force rising at about half that rate, inflationary pressures are rising, Kohn said, and it is the Fed’s job to bear down on them.

Kohn also pointed out that that the Trump Administration’s own policies, particularly its tax cuts, which have helped to juice the economy, are partly responsible for the Fed’s policies. “The fact that interest rates are rising is a tribute, in effect, to the strength of the U.S. economy,” he said.

Whatever one thinks of this policy debate, the paradox of Trump’s intervention is that it has made it much more difficult for Powell and his colleagues at the Fed to alter course. If after their next meeting they were to announce that they are putting rate hikes on hold, many people would interpret the about-turn as a response to the President’s attacks. And, as Larry Summers, the former Treasury Secretary, pointed out, in a television interview on Thursday, no reputable central bank wants to look like it is bending to political pressure.

Baker expressed agreement with this analysis. “I think Trump coming out and saying it makes it harder for [the Fed] to back down,” he said. “I don’t think it is helpful from Trump’s own viewpoint.” Rather than getting involved, the President should have left it to his economic advisers, such as Kevin Hassett, the chairman of the Council of Economic Advisers, to argue that the Fed is rushing things, Baker added.

But, of course, Trump can’t restrain himself. Rather than acting strategically and respecting an institutional setup that, generally speaking, has served the country well, he went loco. Now he—and we—will have to live with the consequences.

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