Trump Flunks Fed Politics
Trump Flunks Fed Politics
Donald J. Trump is a real estate agent, so he naturally prefers low interest rates. But he is also president, and publicly manages the Federal Reserve to keep rates low as he has been doing, which will lead to the opposite of what he wants. This is the federal policy 101.
"Every time we do something big, it raises interest rates," Trump said in an interview with our colleagues in the Journal on Tuesday, referring to Fed Chairman Jay Powell. "He was supposed to be a low interest rate guy. It turns out that it is not. "
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Now, who would say something like that about Mr. Powell? Mr. Trump's Treasury Secretary, Steven Mnuchin, who oversaw the selection of the Fed chairman in 2017. As we reported at that time, Mr. Mnuchin told Mr. Trump to select Mr. Powell in a substantial part because he could be influenced more easily than other candidates. Mr. Trump could have taken other advice.
The truth is that no Fed president can afford to be seen by the markets to take White House interest rates, and when they do, it usually ends in tears. See Arthur Burns with Richard Nixon and G. William Miller with Jimmy Carter. Alan Greenspan and Ben Bernanke were also too politically comfortable with the administrations in power, but that influence was mostly behind the scenes.
Poor Mr. Powell has the arduous task of managing the transition from the largest experiment in the history of monetary policy. Bernanke and later Janet Yellen enjoyed the trip at near-term short-term rates and unprecedented bond purchases to keep artificially low long-term rates. The policy pushed investors toward more risky assets, such as stocks, although it did not do much for a real economy that grew slowly during the Obama administration.
Growth and animal spirits have been revived by Mr. Trump's combination of fiscal reform and deregulation policies. Now, Mr. Powell has to handle the most treacherous monetary road to get back to normal, and Mr. Trump's public beating will not facilitate the President's job. The Fed has indicated that it will raise short-term rates again in December, the fourth time this year. Powell will not want it to look like he's retreating under political pressure, even if economic events suggest he should.
A better criticism of the Fed would be that it should have unwound its huge bond portfolio first and faster than it has. That would have slackened the Fed's control over the long-term bond market, encouraging a previous adjustment of risk assets before the Fed also began to raise rates.
Now the Fed is doing both at the same time, with a higher risk of asset prices and greater political risk for the Fed. See Wednesday's loss in share prices that are now close to the territory of formal correction of a decrease of 10% in the last weeks.
Reducing the Federal Reserve's bond portfolio first and faster is the policy that former Federal Reserve Governor Kevin Warsh recommended before Mr. Trump considered him a finalist for the Federal Reserve Chairman along with the Mr. Powell. But Mr. Mnuchin preferred Mr. Powell, and the President accepted "a low rate of interest rate."
Leaving aside the policy of the Fed, the basic question is whether Mr. Trump is right in stating that the central bank is too strict. We have not thought until now, since short-term rates are still at or below the rate of inflation. Rates should rise from their historical lows in an economy that is growing by almost 4%.
However, there are some signs of slower growth, particularly in housing. New sales of single-family homes fell by 5.5% in September and fell by 13.2% compared to the previous year. Some of this is related to the hurricane, but the affordability of housing is also a problem as mortgage rates rise. The confidence of companies and consumers remains high, but it is worth observing if the prices of stocks and other assets continue to fall.
The biggest economic risk is slower growth abroad, which is why Trump should worry if he does not. The fastest growth in the US UU And the rising interest rates are drawing capital from other markets. Mr. Trump's rates are also affecting trade flows and causing companies to delay some investments. Border taxes are never a free lunch, no matter what the White House adviser, Peter Navarro, tells Mr. Trump.
White House chief of economics Larry Kudlow says Mr. Trump is simply offering his opinion on the Federal Reserve, not issuing an order to Mr. Powell. Undoubtedly, the president is also diverting blame from the White House for any economic slowdown. Mr. Trump needs a sheet more than most politicians. All of which is a good reason for the Fed to ignore the President and focus on getting his policy right, whether that means raising rates in December.
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