Healthy Companies Borrow Cheaply. Trump Thinks Healthy Countries Should, Too

(Bloomberg Businessweek) -- After listening to President Donald Trump at a luncheon speech on Nov. 12, I think I finally understand why he’s so angry at the Federal Reserve for not cutting interest rates more. It’s because Trump views the Fed through the filter of his decades in real estate. In the world he grew up in, the most creditworthy companies borrow the most cheaply. I’m guessing that he believes that government should work the same.

If Trump sees the U.S. as just another business that benefits from cheap credit, it explains why he sees no contradiction in bragging about the strength of the U.S. economy one moment and then asking for a lower federal funds rate the next. That’s how it works in the private sector, after all. A hotel or casino or golf course development that shows strong revenue growth and profitability will deserve—and get—the very lowest interest rate from banks and bond buyers. The only thing the lender cares about is getting paid back, and a healthy borrower is a better bet to repay.

In central banking, things work pretty much the opposite. A country like the U.S. with decent growth will tend to have a higher official interest rate. The central bank—the Fed, in the case of the U.S.—raises rates to slow growth, which keeps the economy from overheating and causing excessive inflation. The Fed cuts the rate precisely when the economy is weakest, to prevent or end a recession.

There’s another big difference. In business, the bank is the one giving the money. In government, the central bank isn’t (usually) the lender. It’s more of an engineer, controlling the availability of money. The actual lending is done by the private sector.

In his Nov. 12 speech to the Economic Club of New York, Trump expressed dismay that the U.S. is competing against nations in which short-term interest rates have gone negative. “Give me some of that money. I want some of that money. Our Federal Reserve doesn’t let us do it,” he said.

But those negative rates in Europe and Japan aren’t some kind of secret weapon. They’re evidence of a big problem: chronically weak growth. The strength of the U.S. economy is Trump’s best argument for reelection. If U.S. interest rates did go negative, it would mean that things had gone very wrong for the U.S. economy, and for his chances for a second term.

To contact the editor responsible for this story: Eric Gelman at egelman3@bloomberg.net

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