Trump's Fed Outburst: All Downside, No Upside
21 July 2018 - 12:04AM
Dow Jones News
By Greg Ip
In a presidency that has seen almost every institution from the
FBI to the Supreme Court consumed by division and controversy, the
Federal Reserve is a shining exception. President Donald Trump's
nominees are widely seen as competent, careful and apolitical.
Mr. Trump's lengthy riff on interest rates Thursday risks
tainting that. In an interview with CNBC he declared himself
unhappy that Fed Chairman Jerome Powell keeps raising rates. If not
an actual violation of Fed independence-- he was complaining, not
instructing -- it was still a jarring departure from the recent
tradition of presidents leaving the central bank alone.
He resumed his criticism Friday morning, taking to Twitter to
say raising interest rates "hurts all that we have done." He added,
"The U.S. should be allowed to recapture what was lost due to
illegal currency manipulation and BAD Trade Deals. Debt coming due
& we are raising rates - Really?"
This isn't just a problem for the Fed, which wants its decisions
seen as driven entirely by economics and data; it's a problem for
Mr. Trump. Inserting himself into monetary policy has virtually no
upside and plenty of downside.
Start with the fact that on the substance, his complaint is
baffling. No president since the 1950s has simultaneously enjoyed
such a strong economy and such cheap credit. The expansion is the
second longest in history, growth has accelerated to around 3%
thanks to massive fiscal stimulus, unemployment at 4% is below most
estimates of its natural rate, and inflation sits at the Fed's 2%
target. And yet interest rates, after rising slowly for two years,
sit just below 2% -- zero in real terms.
Mr. Trump is especially upset by the dollar's rise, which
threatens to widen the trade deficit which he badly wants to
shrink. Yet the Fed is the secondary player here. The dollar is up
against the euro because Mr. Trump's tax cut is lifting U.S. growth
above Europe's. The dollar has risen against the yuan because the
Chinese government is trying to neutralize Mr. Trump's tariffs with
a cheaper currency.
Not only are rates unusually low given the economic backdrop,
they are likely to stay that way. Despite predictions the Fed would
offset the stimulative benefits of the tax cut, the Fed's rate
plans have barely changed since it went into effect.
Of all the candidates Mr. Trump could have put in charge of the
Fed, Mr. Powell is the most dovish. Suppose he had picked John
Taylor, a Stanford University economist, as congressional
Republicans wanted? The Fed's monetary policy report released last
week shows that under the rules Mr. Taylor has popularized, rates
today would already be at least 3%. Even Janet Yellen, the Ph.D.
economist appointed by Barack Obama whom Mr. Powell succeeded,
would be more worried about inflation given today's low
unemployment than Mr. Powell is.
Not only does Mr. Trump get a dovish Fed, he gets one perceived
as competent and nonpartisan. Mr. Powell was confirmed by the
Senate 84 to 13. Mr. Trump's pick for the vice chairman, economist
Richard Clarida, will likely get comparable treatment judging by
the many Democrats on the Senate Banking Committee who backed his
nomination.
Mr. Powell has worked hard to maintain that image of nonpartisan
technocratic competence. In hearings this week he steered clear of
politically contentious debates such as whether the U.S. was in a
trade war. His extensive outreach to Capitol Hill earned him praise
from Democrats and Republicans alike.
One outburst by Mr. Trump won't flush that away, but a few more
might. And for what? Why would Mr. Powell do anything differently?
He has nothing to gain personally from bending policy to suit the
president -- he can't be fired and his term has nearly four years
to go. If the Federal Open Market Committee's other members thought
he'd been politicized, they'd vote against him in a heartbeat. The
market seems to have concluded the same thing: Its outlook on
future rates barely reacted Thursday.
Arguably the opposite could happen. It is unlikely any official,
least of all the chairman, would vote to raise rates solely to
prove the Fed's independence. But some of Mr. Powell's colleagues
wavering between one and two more rate increases this year might go
for two as a show of autonomy. If the economic outlook or inflation
softened unexpectedly, some officials may be slow to abandon
planned rate increases for fear it would look political.
The bigger problem -- for the president and the Fed -- is
optics. Investors will filter his actions and utterances through
politics: Did he do that to please -- or defy -- the president?
Expect every Congressional hearing and every press conference to
include a question about his interactions with the White House. His
schedules show that since becoming chairman, he has not met with
Mr. Trump; given the arched eyebrows it's sure to provoke, he'll
think twice before doing so now. And that's a pity because there
may be times, for example during a crisis, when for the good of the
country he should.
Mr. Trump's nominees to the Fed have so far gotten the benefit
of the doubt; they may no longer. Any with suspiciously dovish
inclinations will face opposition from Senate Democrats. Mr.
Trump's record on the Fed until Thursday was one of which he could
be justifiably proud; shame if it ends up as politicized as
everything else.
Write to Greg Ip at greg.ip@wsj.com
(END) Dow Jones Newswires
July 20, 2018 09:49 ET (13:49 GMT)
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