Trump Is Rude But Right About the Fed

(Bloomberg Opinion) -- It was, of course, grossly unjust for President Donald Trump to cast Federal Reserve chairman Jay Powell as an “enemy” of Americans. There is no reason to doubt that Powell and his colleagues are trying to conduct monetary policy in the nation’s best interest. As much as Powell deserves sympathy over that attack, though, the disconcerting truth is that on several of the issues that divide the two men, Trump has been right and Powell wrong.

In December, the Federal Reserve raised its target for the federal-funds rate and suggested that further rate increases were ahead. Trump raged against the decision, reportedly considering trying to fire Powell. Especially in retrospect, the Fed seems to have erred. The stock market fell on the Fed’s announcement. Inflation expectations, which had just hit the Fed’s supposed target of 2% for the first time in a decade, again sank below it. Expectations of future interest rates dropped, too.

At the end of July, the Fed reversed its December rate hike. The later decision doesn’t prove that the earlier one was wrong. But I suspect that if Powell could do it over, he would have avoided the December rate hike or at least the suggestion that it would be followed by others.

The rate cut in July didn’t mollify Trump. His latest outburst against Powell is based on the idea that money is still too tight. Again, the evidence seems to have borne Trump out: Stocks, expected inflation and expected interest rates all fell after the July announcement.

Trump has repeatedly said that the central bank should cut interest rates and engage in quantitative easing to help him win trade conflicts. Powell’s recent remarks about the harm that “trade policy uncertainty” is doing to the economy have been taken to be his response to this criticism.

Powell has a point when he says that trade fights have complicated his job, and his defenders are right to say that no central bank can undo all the damage of these conflicts. When Trump imposes tariffs on inputs used by U.S. companies, those companies will become less efficient and the Fed can’t do anything about it.

Yet Trump is onto something important even on this question. Tariffs and uncertainty about future trade restrictions seem to be pulling the “neutral” or “equilibrium” interest rate, which neither expands nor contracts the economy, downward. That’s a reason for Trump to reconsider his trade policies. But it’s also a reason for the Fed to reduce its target interest rate.

Leaving the target rate unchanged while the neutral rate falls amounts to a tightening of policy, albeit a passive tightening. That’s a way to convert the microeconomic damage of a trade conflict into macroeconomic damage, and even a recession. To say, as Bill Dudley does in a column for Bloomberg Opinion, that the Fed should refrain from cutting interest rates to ensure that the full cost of Trump’s trade policy is visible is to say that the Fed should compound his errors with its own.  

Should the president be opining as frequently as he does about monetary policy? Probably not. Markets freaked out, to use the technical term, when Trump talked about firing Powell in December. Even though the collective view of traders appeared to match Trump’s that money should be looser, it also regarded political interference with central banks as dangerous. This is a reasonable view.

On the other hand, monetary policy is one of the central ways government affects the economy, so there can’t be an absolute prohibition on elected officials’ commenting on it. As Trump illustrates, sometimes politicians will have better instincts than the professional policymakers at the central bank. His penchant for labeling those who disagree with him traitors, unfortunately, also illustrates one of the reasons presidential commentary on the Fed should be discouraged: It requires a degree of judgment and discretion that presidents won’t always, and some presidents will never, possess.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Ramesh Ponnuru is a Bloomberg Opinion columnist. He is a senior editor at National Review, visiting fellow at the American Enterprise Institute and contributor to CBS News.

©2019 Bloomberg L.P.

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