No producer in his right mind would try to make a reality TV show about central banking. Yet somehow Donald Trump is managing to generate drama out of monetary policy, of all things.
For the past week, the president has ripped into the US Federal Reserve for its policy of raising interest rates, which has made borrowing slightly more expensive.
Rate hikes are “my biggest threat,” the president told the Fox Business Network yesterday, escalating the central bank-bashing he launched last week, in response to a series of down days on the stock market. On Oct. 10, he called the Fed “loco,” “wild,” and “ridiculous.” In a Fox News interview the following day, Trump made it even more personal. “I’m paying interest at a high rate because of our Fed,” he said. “And I’d like our Fed not to be so aggressive because I think they’re making a big mistake.”
Trump’s distaste for higher rates is understandable, given that the former real estate magnate has dubbed himself the “king of debt.” But underlying his feud with the Fed, Trump makes a perfectly fine point. The risks of keeping rates too low seem less pressing than of raising them too fast.
This brings us to an unfortunate paradox: Thanks to the Fed’s need to maintain the appearance of independence, Trump’s histrionics have now made it much harder for it not to keep hiking interest rates.
So far this year, the central bank—which is chaired by Jerome Powell, a Trump appointee—has nudged up its key short-term interest rates three times; its latest hike, in September, pushed its benchmark rate to an upper bound of 2.25%. It was the eighth consecutive increase since late 2015. Markets expect another hike in December, followed by another few in 2019.
Trump’s latest criticism of the Fed didn’t come out of nowhere. The president had first surprised market watchers in July when he took to Twitter to bellyache about higher interest rates.
Trump is flouting presidential norms of honoring central bank independence—that is, letting the Fed set monetary policy in a technocratic vacuum, sealed from the taint of politics (more on that later). The president’s tone has turned much more pointed in the past week, seemingly in response to the slump in stocks. In yesterday’s interview with Fox Business, Trump said, “I’m not happy with what [Powell is] doing because it’s going too fast because you look at the last inflation numbers, they’re very low,” he said.
He’s right: they are. Consumer prices climbed only 2.3% in the year to September. With inflation so mild, why, then, is the Fed tightening? Powell’s approach seems to be to raise rates gradually to head off an inflationary flare-up that should result from the hot jobs market and strong economy. With real rates still hovering near zero, building up a buffer in order to have room for stimulus when the economy cools is another consideration.
However, some economists object to this strategy, highlighting that the risks of rate hikes outweigh the benefits. With inflation so low—and signs of labor market slack persistent—there seems to be little harm in letting it climb a little, and “an enormous amount of potential gain” for workers, says Dean Baker, economist at the Center for Economic and Policy Research, a left-leaning non-profit research group.
“People are getting jobs who have very little opportunity in the economy, and we don’t usually have good options for these people,” he adds. “That seems like a good tradeoff.”
This brings us back to central bank independence, which most mainstream economists view as a sacred tenet of effective monetary policy. Trump is aware enough of this that he insisted in yesterday’s interview that the Fed is “independent” and that he doesn’t speak to Powell.
Ironically, though, by airing his views so publicly and relentlessly, Trump has limited the Fed’s choices, according to Vincent Deluard, global macro strategist at INTL FCStone, a New York-based financial services firm. “Politically, Fed-bashing may help the President distance himself from the performance of the Dow Jones Industrial Average, which had been heralded as the yardstick of executive excellence until last week,” Deluard writes. “On the other hand, it might prove counter-productive economically: A central bank under a constant stream of political attacks may be less inclined to ease, if only to prove its independence.”
After all, notes Ian Shepherdson, chief economist at Pantheon Macroeconomics, if the Fed were to hold off on expected rate hikes, it would look like it was caving to the president’s pressure. “Does Jay Powell want to go down in history as the Fed Chair who was pushed around by the president, opening the door for future political manipulation of monetary policy?” asked Shepherdson in a note. “We doubt it.”