President Trump, your Fed envy is showing
The Federal Reserve is one of the most powerful institutions on earth. It can wave a wand and create money. It can set the rates at which large banks borrow from each other and from the Fed itself. And it can intervene during financial crises, as it did in 2008.
For this reason, politicians have long had a serious case of envy. It bothers them to no end that some nerdy economists can do so much while they are often powerless and at the mercy of events beyond their control.
This Fed envy has come largely from members of Congress, who have introduced measures to curtail or even abolish the institution and frequently criticized its decisions. Presidents, by and large, have stayed out.
Until now. President Donald Trump lit into the Fed for raising interest rates by a quarter point in June, and again when it hiked rates in late September. This week, as the stock market plunged nearly 1,400 points in a two-day rout on Wednesday and Thursday, he went on a whining spree, accusing the Fed of having “gone crazy,” being “loco” or being “out of control.”
This is monumentally misguided behavior.
For starters, Trump is dead wrong on at least two accounts. To the extent that the sell-off was driven by interest rates (and not, say, rising trade tensions or slowing economies abroad) it was the result of long-term rates for things such as mortgages, business loans and 10-year bonds. These are determined by markets, not the Fed. And the fact that they have been rising faster than the short-term rates set by the Fed is generally seen as a good sign for the economy.
As for the Fed, its funds rate, pegged between 2-2.25%, is well below historic norms and is still juicing an economy no longer in need of juicing. The question isn’t why the Fed is hiking rates by a quarter point every few months, but why it didn’t start earlier.
Even more important than the wrongheadedness of Trump’s critiques is the fact that they undermine the Fed- eral Reserve’s independence. When politicians make interest rate decisions, their motivations are political, not economic. Those in power will almost always favor low rates because they stimulate the economy. Those out of power often take the opposite view, arguing that low rates generate inflation, but they’re usually motivated by a desire to attack the other party’s economic performance. That’s no way to run a railroad, or a central bank.
Knowing the stakes when it was created in 1913, Congress and President Woodrow Wilson built a Fed system expressly designed to keep the politicians out. It would be run by national governors, appointed to lengthy fixed terms, and regional presidents, selected by business leaders. For more than a century, it has worked very well.
On the surface, Trump’s criticism of the Fed for raising rates might not seem like such a big deal, especially when Chairman Jerome Powell brushes him off, as he did last month.
Even so, Trump is at least starting down a dangerous path when he critiques interest rate decisions. His admonitions sound like something one might find in a corrupt, dictatorial regime in the developing world, not in the United States.
When it comes to Fed policy, there is only one good thing a president can do: Nothing at all.