Ses­sions’s ouster sug­gests Trump’s Fed fight over rates is about to get uglier

The Washington Post - - ECONOMY & BUSINESS - MATT O’BRIEN

Pres­i­dent Trump’s con­tin­u­ing at­tempts to stop the Jus­tice Depart­ment from do­ing what he doesn’t want it to has an eco­nomic les­son for us, as well: The Fed­eral Re­serve is next.

The sim­ple story here is the Fed is rais­ing rates more than Trump would like, and it seems like a mat­ter of time un­til his es­ca­lat­ing war of words against it turns into ac­tion. Trump, af­ter all, has al­ready gone from say­ing he’s “not thrilled” with what the Fed is do­ing to be­ing “very un­happy” about it to con­sid­er­ing it to be the “big­gest risk” to the econ­omy. So you don’t ex­actly have to read be­tween the lines when Trump says, as far as he’s con­cerned, the Fed is in­de­pen­dent only “in the­ory.”

This, of course, is only go­ing to get worse the closer we get to the 2020 elec­tion. There are two rea­sons for this. The first is the Fed has given ev­ery in­di­ca­tion that it’s go­ing to keep in­creas­ing in­ter­est rates at the same slow and steady pace it has set for the past two years. While it didn’t raise them at its meet­ing Thurs­day, it made a point of re­it­er­at­ing more rate hikes are com­ing soon. Why wouldn’t they? Trump pushed a $1.5 tril­lion deficit-fi­nanced tax cut for cor­po­ra­tions into the econ­omy at a time when un­em­ploy­ment was al­ready 4.1 per­cent. That has forced the Fed to raise in­ter­est rates more than it was go­ing to, so it might not be long be­fore rates are up to about 3 per­cent or even higher.

That might not sound like much, and it’s not by his­tor­i­cal stan­dards, but it is by our cur­rent-day ones. In­ter­est rates are still zero in both the euro zone and Ja­pan. That means in­vestors can do a lot bet­ter putting their money in U.S. Trea­sury bonds than in, say, Ger­man ones — and when they do, the dol­lar goes up. Quite a bit, in fact. Con­sider this: Since the start of the year, the dol­lar, on a trade-weighted ba­sis, is up 7.6 per­cent against a broad bas­ket of cur­ren­cies and is near a 20-year high.

That’s the sec­ond rea­son Trump’s fight with the Fed is go­ing to get a lot uglier. A stronger dol­lar hurts two of the things he talks about most on the econ­omy: the trade deficit and fac­tory jobs.

It’s fairly straight­for­ward: The higher the dol­lar gets against other cur­ren­cies, the more our ex­ports cost in other coun­tries. So they will buy less of what we make — par­tic­u­larly man­u­fac­tured goods — and we’ll buy more of their cheaper goods. This isn’t nec­es­sar­ily an eco­nomic prob­lem, but it can be a po­lit­i­cal one. At least it was for Democrats in 2016. That was the last time the dol­lar got this high, and the re­sult was a lo­cal­ized blue-col­lar re­ces­sion that might have helped tilt piv­otal Rust Belt states to Trump.

Trump is go­ing to keep feel­ing threat­ened by the Fed. As we’ve seen, he doesn’t let things like norms get in the way when he feels threat­ened — es­pe­cially be­fore an elec­tion. He’ll fire or push out whomever he has to, even if they’re sup­posed to be in­de­pen­dent. That was the case with the FBI di­rec­tor and the at­tor­ney gen­eral, and it could be­come the case with Fed Chair­man Jerome H. Pow­ell. That said, there is a dif­fer­ence here: Jus­tice Depart­ment of­fi­cials are only un­of­fi­cially in­de­pen­dent, while the Fed chair is as a mat­ter of law. The head of the Fed can be fired only “for cause,” which gen­er­ally isn’t con­sid­ered to in­clude pol­icy dis­agree­ments. That’s the kind of thing that would need to be en­forced by the courts. Would they? Good ques­tion. In the mean­time, you might want to pay ex­tra at­ten­tion to any­one on tele­vi­sion who says the Fed is rais­ing rates too fast. There’s a good chance Trump will be.

AARON P. BERN­STEIN/BLOOMBERG NEWS

Fed­eral Re­serve Chair­man Jerome H. Pow­ell takes notes at a meet­ing. He could be next on Pres­i­dent Trump’s list of of­fi­cials to push out.

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