Trump Gets His Own Economic Policy, Not His Own Fed

(Bloomberg Opinion) -- When it comes to the Federal Reserve, President Donald Trump’s cause is just. His means, however, are — how to put this? — crazy. It will be up to the Fed and Congress, specifically the Senate, to find a way to honor the president’s goals without validating his approach.

Trump is not wrong that the Fed has become insular, relying too much on academics and theoretical models, and needs fresh thinking. Even at institutions like the Fed, politics has an important role to play, keeping them responsive to the needs of the people. Experts, especially when surrounded by other experts, have a tendency to focus on details and miss the big picture.

Trump is the opposite: The big picture is pretty much the only one he sees. He is, therefore, in an ideal position to be a catalyst for the type of change the Fed requires.

The problem is the way Trump goes about it: repeatedly criticizing the Fed for sabotaging his economic agenda, musing about firing Chairman Jerome Powell and suggesting unqualified partisans like Stephen Moore and Herman Cain for the Fed’s board.

But this clash of styles this doesn’t have to play out in a confrontational way. Remember what happened last December, just before the Fed’s meeting. Trump tweeted:

The Fed took a different approach. Judging that various tailwinds were already accelerating economic growth, it decided to raise rates. That was the wrong call, and the markets took a nosedive. The Fed then went into damage control mode, reassuring investors that the Fed is “listening very carefully” to the market.

As 2019 began, the economy slowed and inflation decelerated. By March, Chairman Jerome Powell had declared low inflation “one of the major challenges of our time.”

Powell’s comment was exactly right, but one press conference will not change the low inflation bias of the Federal Reserve. The only thing that can do that is sustained political pressure, of that type Trump is so eager to give.

Trump’s intensity, however, needs to be focused. If raising the possible nomination of Moore was meant to send a serious message, actually confirming both him and Cain would court disaster. In the midst of a financial crisis, the Fed has to provide resolute leadership and guide the markets with a gravitas that these men simply lack.

So is there a way to balance the Fed’s interests with the president’s? If there is, a lot of it will fall to the Senate. It must take seriously its mission to advise and consent. That means declining both these nominations, if they’re put forward, but also working with the president to find more serious reform-minded experts to sit on the Fed board.

As it does with Supreme Court justices and other federal judges, the Senate leadership ought to put forward a list of names of potential nominees whose background and experience would ensure a smooth confirmation. Lawrence Lindsey, a former Fed governor and National Economic Council director under President George W. Bush, is one such example. He has become a steady critic of the Fed’s tendency to raise rates because the economy is strong, even when inflation has yet to appear. 

There are others in the same mold, well-respected figures in the field who could bring the fresh thinking the president wants without the instability the markets fear — and without degrading the Fed’s well-deserved reputation for competence and sobriety.

The president has every right to set his economic agenda. But that agenda has to be tempered by the long-term perspective and respect for institutional stability that the Senate can provide.

To contact the editor responsible for this story: Michael Newman at mnewman43@bloomberg.net

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

Karl W. Smith is a former assistant professor of economics at the University of North Carolina's school of government and founder of the blog Modeled Behavior.

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