Trumping The Fed

Given the speed of the news cycle, I would not be surprised if you blinked and missed the moment in mid-July when President Trump told CNBC that he was unhappy with the Federal Reserve.

As violations of White House precedents go, this one may seem almost laughably tame. From a president who has never hesitated to break with presidential tradition, publicly criticizing the Fed despite a traditional taboo is hardly shocking. The more interesting question is why he bothered.

Previous presidents have only rarely broken the unspoken prohibition against publicly expressing their opinion of the central bank’s monetary policy, especially given the importance of the Fed’s independence to its function. Some may recall hearing recordings from 1971 of Richard Nixon pressuring Fed Chairman Arthur Burns to reverse course on raising interest rates in a bid to help Nixon’s reelection campaign. Nixon also leaked information to the press to further his efforts. Some believe the Federal Reserve caving to such pressure helped usher in a period of stagflation – a period where economic growth is low and inflation and unemployment are high.

Trump told CNBC that he understood he was breaking with protocol in criticizing the Fed’s decision to raise interest rates twice so far this year, but that he did not care. “Now I’m just saying the same thing that I would have said as a private citizen,” Trump said. “So somebody would say, ‘Oh, maybe you shouldn’t say that as president.’ I couldn’t care less what they say, because my views haven’t changed.”

It is possible that this claim is true, at least inasmuch as Donald Trump the president is expressing what Donald Trump the private citizen might have said in July 2018; we cannot know for sure. What we can know is what Trump the presidential candidate said about the Fed’s policy before he became Trump the president. In September 2016, Trump was also loudly criticizing the Fed – but then it was for keeping interest rates low, a move he claimed helped then-President Barack Obama.

“They’re keeping the rates down so that everything else doesn’t go down,” Trump said of the Federal Reserve at the time. “We have a very false economy.” He also questioned the positive performance in the stock market due to his belief that low interest rates were inflating stock returns.

To review: The Fed was keeping rates too low before Trump took up residence in the White House. But now it is raising them too much and putting the United States at a disadvantage in doing so.

Regardless of Trump’s comments, I think he is unlikely to make a move to violate the Fed’s integrity. In the same CNBC interview where he expressed frustration, Trump also doubled down on his nomination of Chairman Jerome Powell, saying he “put a very good man in” at the Fed. Trump also stopped short of directly calling for the Fed to stop raising interest rates. If the president actually attempted to interfere with or remove Powell or other Fed governors, the pushback would be both immediate and major.

Instead, I suspect that Trump is laying the groundwork to use the Fed as a scapegoat in case the inevitable market downturn arrives on his watch. Recessions are a natural part of the market cycle, and we have been in a very long upswing. Trump and his administration have been quick to take credit for good economic conditions, including the rise in the stock market. By hitching his wagon to the market’s performance, Trump has opened the door for criticism when markets fall, warranted or not. His remarks regarding the Fed are a pre-emptive effort to set up an “I told you so” moment should one prove necessary. It is a similar strategy to the way he is quick to label any unflattering media coverage “fake news,” regardless of the reporting’s quality.

It is best that the president seems unlikely to interfere with monetary policy directly, and not only for protocol’s sake. His current criticism of the Fed’s decision to raise interest rates demonstrates a lack of basic economic understanding. The Fed must balance various priorities when setting monetary policy. If it raises rates without sufficient growth, it could indeed tamp down expansion, but the economy is booming. The most recent report on gross domestic product pegged it at 4.1 percent for the second quarter of 2018, the fastest growth in nearly four years. Economists have said that this figure is probably an outlier, but that any deceleration will likely not be major. Even if GDP growth falls to 3 percent, that still represents strong performance for an economy as large as the United States.

In our present atmosphere, the more salient question is whether the economy is close to “overheating” – that is, expanding at an unsustainable rate. Powell doesn’t think so. (Neither does my colleague Paul Jacobs, who wrote about the topic in this space earlier this year.) But there are other real dangers inherent in keeping interest rates too low for too long. The Fed must guard against the possibility of outsize inflation triggered by lower-than-appropriate interest rates. In addition, if interest rates stay too low, financial institutions may take on excess risk in order to turn a profit, since they earn relatively little through loans. At this point, the Fed is still working its benchmark interest rate back toward historically normal levels, which is hardly an excessive tactic given today’s economic conditions.

Experts can and do disagree on exactly when the Fed should raise interest rates and by how much. But after years of rock-bottom rates and in our current atmosphere of growth, the suggestion that the Fed is in danger of scuttling the economy outright is far-fetched. As with trade deficits, Trump’s comments are more about what sounds good to him and his political base than about accuracy. But no one who supports Trump does so for his subtle grasp of macroeconomics. Criticizing the Fed, like much of Trump’s trade rhetoric, serves as a rhetorical device.

The Fed is the latest institution to get different treatment from Trump the candidate and Trump the president, but it is hardly the first. According to candidate Trump, the Labor Department peddled fake unemployment statistics to flatter the Obama administration. Yet in March 2017, shortly after Trump took office, then-White House Press Secretary Sean Spicer was happy to trumpet the low unemployment rate as a presidential achievement. The jobs report “may have been phony in the past, but it’s very real now,” Spicer told the press in a briefing. And Trump hasn’t hesitated to break economic protocol where the Bureau of Labor Statistics is concerned, either, tweeting about the June 2018 jobs report before the Labor Department officially released it.

While his specific positions may shift, one thing remains consistent between Trump the candidate and Trump the president: He is always on the offensive. For a president who has never been afraid to break with tradition, winning points by criticizing the Fed is just one more day at the Oval Office.

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