Federal Reserve rate cavalry to the rescue

THE political drama that’s playing out in Washington has one actor that hasn’t yet been introduced — the Federal Reserve.

And while the Fed may only be an understudy at this point, it could end up with a leading role. Let me explain. The Fed has raised interest rates six times since 2015, the last hike coming this past March. This has been a slow crawl upward from the extraordinarily low rates that the Fed instituted to combat the Great Recession that began in late 2007.

Under Chairman Jerome Powell, the Fed has said that rates are rising because the economy is either doing better or is about to do better (it said the same kind of things when Janet

Yellen was on the job). But there’s another reason the Fed has been pushing rates higher — and it has more to do with preparing for a future shock than it does with any guesswork on the improving economy.

The Fed needs rates up, so it can bring them down in the case of an emergency.

Most people assume that the emergency will be of an economic nature, say, if business conditions weaken so much that they need to be boosted through lower borrowing costs.

But the Fed may also have to respond to a political emergency like the attempted impeachment of President Trump or some other sort of Washington chaos.

I don’t think Trump will get impeached. And I don’t think special counsel Robert Mueller has the goods on him.

Some of Trump’s aides may have done something wrong, but I don’t think that will rise to a level that would jeopardize the president.

But, as they say, you never know. The situation is especially uncertain if — as I’ve thought all along — the Republicans, who don’t like Trump as the head of their party, gang up against the president. And that’s where the Fed comes in. A political attack on Trump would create a constitutional crisis that will upset the financial markets. Trump, after all, has been good for Wall Street. He’s produced tax reform that companies wanted, and the market has risen nicely since he was elected.

The minute Trump looks to be in genuine jeopardy, investors will start worrying about the effect on the economy. And the stock market will become unnerved.

America, as you may have heard, is already saddled with an enormous amount of debt. And that indebtedness is going to increase because of the tax cuts that companies want but fiscal conservatives don’t.

Congress is not going to be able to increase government spending if the economy is damaged by a political crisis in Washington.

That will leave the job of protecting the economy in the hands of the Fed. And while no Fed boss will ever admit to acting to offset the effects of political turmoil on the financial markets, that could be what ultimately happens.

It’s good to look at the late 1990s for clues as to what could happen again if the political situation in Washington deteriorates further.

Back then, Alan Greenspan was helming the Fed. And, as so today, there were a lot of economic things going on when — in late 1998 — a bill of impeachment was brought against President Clinton.

As you probably know, the Senate let Clinton off the hook.

What was the Fed doing during this time? Cutting rates like crazy.

There were rapid-fire rate reductions in September, October and November of 1998. Then, the Fed stayed pat for six months before resuming rate hikes.

Fortunately, there were other things going on (severe financial problems in Russia, the failure of hedge fund Long-Term Capital Management, and the irrational Y2K fears when the new century started) when the Fed was cutting rates. So Greenspan never had to concede that the impeachment had anything to do with his decisions.

But the Fed’s interest rates were around 5 percent when all this was going on. Today, the fed funds rate is a puny 1.75 percent — even after six hikes.

That leaves the Fed very little room to bring rates lower in the event of an emergency — political or otherwise.

While the Fed has signaled that there will be two more rate hikes this year, some experts have speculated that there might actually be three.

The notion that the Fed might be preparing for a political rescue mission is given a little more credence by the fact that many experts would ar- gue that economic growth on its own right now does not justify the Fed’s aggressiveness on rates.

The US economy seems to have grown at only a 2 percent annual rate in the first quarter of 2018. And while inflation has picked up — something the Fed wants to happen because it indicates economic health — the increase in prices alone is also not a good enough explanation for what the Fed has been doing.

And while the Fed keeps arguing that the economy is about to take off and bring inflation with it, that’s an argument we’ve been hearing for years.

Maybe it’s true this time because of the tax cuts. But the effect of those tax cuts on the economy might be lessened l greatly by the higher interest rates that the tax changes caused in the bond market.

One obvious reason for the rate hikes might be fairness: Savers in the US have been penalized for 10 years by what the Fed has done. I’ve just explained to you the less obvious reason for the hikes: The Fed is gearing up to rescue America like some cartoon superhero. And it just might need rescuing if Washington’s politics get any crazier.