Trump has made it harder for the Fed to do the right thing
The central bank doesn't want to look like they're following the president's orders
President Trump really wants the Federal Reserve to cut interest rates. He's repeatedly accused the central bank of holding back economic growth and undermining his trade war with China. After the Fed paused its rate increases in January, Trump demanded rate cuts, and threatened to put at least two forthright cronies on the Fed board. Just this Monday, Trump went on CNBC and attacked the central bank again: "They certainly didn't listen to me because they made a big mistake. They raised interest rates far too fast."
The markets seem to think Trump will get what he wants. They're currently pricing in a 70 percent chance the Fed will reduce interest rates in July, and a 60 percent chance they'll cut three times in 2019. On the economic merits, the Fed would certainly be justified in doing so.
Yet the Federal Reserve may hold back. And if they do, it will most likely be because Trump decided to open his big mouth.
Subscribe to The Week
Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.
Sign up for The Week's Free Newsletters
From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.
From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.
That the Fed should make its monetary policy decisions independent from the executive branch is a norm cherished by American elites across the ideological spectrum. But it was not always thus: Back during World War II, the Fed essentially took orders from the Treasury Department, and kept interest rates pegged very low to finance the government's massive war spending. But by 1951, Fed officials feared the perpetually low interest rates had opened the door to inflation, which had just cracked 21 percent. In two meetings early that year, the Treasury Department finally backed down, allowing the Fed to adjust interest rates as it saw fit.
Executive branch pressure didn't go away entirely, of course. The current conventional wisdom points to President Nixon in particular, for browbeating the Fed into keeping rates lower, and thus setting the stage for the inflation crisis of the 1970s. It wasn't until Fed Chairman Paul Volcker massively hiked interest rates and set off a brutal recession, ignoring massive public and congressional unrest in the process, that inflation was finally contained. That episode didn't really change the Fed’s relationship to the executive — Volcker had the support of both Presidents Carter and Reagan. But it did solidify the Fed's reputation as the institution that inflicts the unpopular but necessary pain to keep inflation down. The modern norm of Fed independence is really founded on the assumption that if the Fed loses its freedom to inflict that pain, inflation will take off again.
Of course, Donald Trump, being Donald Trump, has no use for your pesky norms. Not only does he routinely criticize the Fed in public, and call up Fed officials like Chairman Jerome Powell in private, but Trump also implies things would be better if U.S. monetary policy was run more like it is in authoritarian countries. In his CNBC interview, Trump noted that President Xi of China is also the head of the central bank there — "He can do whatever he wants," Trump mused — and complained that this gives Xi an unfair advantage in our two countries' ongoing trade fight. The message there is hardly subtle.
Thus far, Powell and the other Fed officials have dealt with Trump via a strict policy of non-engagement. Powell never mentions the president in his public statements, never responds to any attacks, and resolutely refuses to bring up politics when explaining the Fed's monetary policy decisions. Clearly, the chairman and his colleagues care deeply about the Fed's reputation as a politically independent entity, and want to preserve it. "We're never going to take political considerations into account or discuss them as part of our work," Powell insisted in January. "We're human. We make mistakes. But we're not going to make mistakes of character or integrity."
The problem is that, even if Powell isn't engaging with the president, everyone else still sees Trump's attacks. The Fed has already paused its interest rate hikes. If it cuts rates, it will just further increase the appearance of correlation between Trump's preferences and the central bank's decisions. There's anecdotal evidence that many investors and observers abroad already assume the Fed is bowing to Trump's bidding. Powell has been equally clear he won't do the opposite of what Trump demands simply for the sake of contrast. But every time Trump criticizes the central bank publicly, the pressure mounts for Fed officials to distinguish themselves. "By lowering borrowing costs, the central bank would be giving Mr. Trump exactly what he wants, creating a risk that it will look political even though it is acting on economic fundamentals," the New York Times observed.
Further complicating matters here is the question of whether the Fed's freedom is really worth preserving. The story above, about how loose monetary policy under Nixon led to inflation, has a few holes in it. Both the causes and the best solutions for the inflation crisis of the 1970s are disputable, to put it mildly. The modern era of Fed independence delivered low and stable inflation, to be sure; it also delivered income stagnation, rising inequality, jobless recoveries, mass economic insecurity, and an economy stuck in a near-permanent semi-slump. Indeed, if the Fed does cut rates this year, it would be a remarkable rejection of the general inflation hawkery that has guided the central bank for decades.
A responsible president could've dealt with these matters by getting into the nitty gritty of Federal Reserve appointments: questioning potential appointees on their theories of monetary policy, their read of Fed history, their takes on the causes of inflation, and their opinion of past decisions like Volcker's. A responsible president could also seek to reform the Fed itself: change its structure and its instructions from Congress to make it more democratic, and more accountable to the everyday workers whose job prospects rise and fall on the central bank’s decisions.
Instead, we got Trump, who is not a responsible president. He has the gumption to ignore elite opinion, but neither the intelligence nor the character to build a workable alternative. By all accounts, Trump initially handled monetary policy on autopilot, filling three vacancies on the Fed board and promoting Powell to Fed Chair based on whatever his White House officials advised. Then Trump disavowed the very people he appointed the second they didn't cooperate with his desires. "It's more than just Jay Powell," Trump told CNBC. "We have people on the Fed that really weren't — you know, they're not my people."
Now, to top it off, Trump could spook his own Fed officials, right as they may be working up the courage to do the right thing.
Sign up for Today's Best Articles in your inbox
A free daily email with the biggest news stories of the day – and the best features from TheWeek.com
Jeff Spross was the economics and business correspondent at TheWeek.com. He was previously a reporter at ThinkProgress.
-
The best TV spy thrillers
The Week Recommends Brilliant espionage series, packed with plot twists to keep you hooked until the end
By Irenie Forshaw, The Week UK Published
-
Ukraine-Russia: are both sides readying for nuclear war?
Today's Big Question Putin changes doctrine to lower threshold for atomic weapons after Ukraine strikes with Western missiles
By Harriet Marsden, The Week UK Published
-
Hugh Corcoran and The Yellow Bittern: is the customer really always right?
Talking Point A new London restaurant has caused controversy by complaining about customer eating habits
By Richard Windsor, The Week UK Published
-
US election: who the billionaires are backing
The Explainer More have endorsed Kamala Harris than Donald Trump, but among the 'ultra-rich' the split is more even
By Harriet Marsden, The Week UK Published
-
US election: where things stand with one week to go
The Explainer Harris' lead in the polls has been narrowing in Trump's favour, but her campaign remains 'cautiously optimistic'
By Harriet Marsden, The Week UK Published
-
Is Trump okay?
Today's Big Question Former president's mental fitness and alleged cognitive decline firmly back in the spotlight after 'bizarre' town hall event
By Harriet Marsden, The Week UK Published
-
The life and times of Kamala Harris
The Explainer The vice-president is narrowly leading the race to become the next US president. How did she get to where she is now?
By The Week UK Published
-
Will 'weirdly civil' VP debate move dial in US election?
Today's Big Question 'Diametrically opposed' candidates showed 'a lot of commonality' on some issues, but offered competing visions for America's future and democracy
By Harriet Marsden, The Week UK Published
-
1 of 6 'Trump Train' drivers liable in Biden bus blockade
Speed Read Only one of the accused was found liable in the case concerning the deliberate slowing of a 2020 Biden campaign bus
By Peter Weber, The Week US Published
-
How could J.D. Vance impact the special relationship?
Today's Big Question Trump's hawkish pick for VP said UK is the first 'truly Islamist country' with a nuclear weapon
By Harriet Marsden, The Week UK Published
-
Biden, Trump urge calm after assassination attempt
Speed Reads A 20-year-old gunman grazed Trump's ear and fatally shot a rally attendee on Saturday
By Peter Weber, The Week US Published