Analysis

Trump vs. the Fed

President Trump upended "long-standing White House protocol" by attacking the Federal Reserve's decision to raise interest rates

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"Independence from presidential criticism has long been a hallmark of the Fed's existence," said Jim Tankersley at The New York Times. Last week, in a televised interview, followed by a flurry of tweets, President Trump upended "long-standing White House protocol" by attacking the Federal Reserve's decision to raise interest rates. With two increases this year, the Fed has hiked its short-term interest rate to 2 percent. It plans to raise rates twice more before year's end, to keep a lid on inflation and return interest rates, at historic lows since the 2008 bank crisis, back to normal levels. Trump believes the Fed's moves could "derail" the White House's efforts to spur the economy. Although the economy has momentum and unemployment remains low, wages are still stagnant. If the Fed raises rates too fast, it could halt growth. But if it moves too slowly, the economy "could overheat and ignite a rapid spiral of price increases," prompting a recession. "It's a delicate political and economic balance." Instead of chastising Jerome Powell, the Fed chairman he appointed himself, Trump should be thanking the Fed, said Caroline Baum at Market​Watch. The Fed's careful approach is designed to avoid "slamming on the brakes" when inflation accelerates, "sending the economy into recession just in time for the 2020 election."

Trump actually has a point, said Jordan Weissmann at Slate​. His assertion that by increasing borrowing costs the Fed "is frustrating his efforts to juice the economy and wage a trade war using tariffs" is fairly accurate. Higher interest rates lead foreign investors to invest more in U.S. bonds, driving up the dollar. That makes imports cheaper, undercuts the impact of Trump's tariffs, and increases the trade deficit. Still, complaining about rising rates now is hypocritical of Trump, who slammed the previous Fed chair, Janet Yellen, for keeping rates low in 2016. Trump has "crossed a line," said Peter Conti-Brown at The Wall Street Journal. For central banks, "appearance matters as much as substance." The Fed's current policy of increasing rates is already a fraught process. But now, if the Fed does slow rate increases, the public will deem it "a Trumpian victory." And if it ends up raising rates faster, Trumpists will cry foul and declare war. "Either result would be devastating."

Does Trump really want to control the Fed? No, said Tyler Cowen at Bloomberg, "in essence, Trump wants a fall guy." If his trade war "or just plain bad luck" rattles the U.S. economy, the Fed is a convenient scapegoat. Just remember, we've been here before, said Matt O'Brien at The Washington Post. Trump is by no means the first president to want the Fed to juice the economy. Leading up to the 1972 election, President Richard Nixon bullied then–Fed chair Arthur Burns into rate cuts. Nixon won, basking in the temporary glow of improved economic growth. But the economy was soon beset by out-of-control inflation, which lingered for a decade. When George H.W. Bush tried the same thing in 1992, Alan Greenspan's Fed "held firm," and Greenspan may even have avoided cutting interest rates to show that the Fed couldn't be pushed around. Unemployment stayed high, and Bush lost the election.

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