Don­ald Trump vs. the Fed­eral Re­serve

The Fed cer­tainly is not in­fal­li­ble, but it ought to be in­de­pen­dent

Pittsburgh Post-Gazette - - Weekend Perspectives - Robert J. Sa­muel­son is a syn­di­cated columnist for The Wash­ing­ton Post.

Pres­i­dent Don­ald Trump, do your­self a fa­vor. Stop at­tack­ing the Fed­eral Re­serve and its chair­man, Jerome Pow­ell (yes, the same Mr. Pow­ell you nom­i­nated). The re­sult would be bet­ter for you, bet­ter for Mr. Pow­ell and — most im­por­tant — bet­ter for the coun­try.

Un­for­tu­nately, Mr. Trump can’t seem to re­strain him­self. The Fed has been raising short-term in­ter­est rates since late 2015 and is re­port­edly con­sid­er­ing an­other in­crease in De­cem­ber. Mr. Trump is livid at the prospect. Here is his lat­est anti-Fed out­burst from a Nov. 27 in­ter­view with The Wash­ing­ton Post:

“I will tell you, at this mo­ment in time I am not at all happy with the Fed . ... They’re mak­ing a mis­take be­cause … my gut tells me more some­times than any­one else’s brain can ever tell me . ... I’m not even a lit­tle bit happy with my se­lec­tion of Jay. Not even a lit­tle bit.”

Un­til re­cently, there seemed to be a crude con­sen­sus among economists that the Fed should con­tinue its grad­ual in­creases in in­ter­est rates to pre-empt higher in­fla­tion. The econ­omy seems strong enough to tol­er­ate tighter credit. The un­em­ploy­ment rate of 3.7 per­cent is the low­est since the 1960s; in­fla­tion is around 2 per­cent; con­sumer con­fi­dence is high.

But the con­sen­sus may be fray­ing. There are signs of weak­ness. The stock mar­ket has fallen; hous­ing sales and prices have soft­ened; the trade war be­tween the United States and China con­tin­ues. Per­haps the Fed should de­lay fur­ther in­creases in in­ter­est rates? When Mr. Pow­ell obliquely sug­gested that last week in a speech, the stock mar­ket staged a brief, huge rally.

The Wall Street Jour­nal re­cently il­lus­trated the dis­agree­ment. On Nov. 27, the pa­per ran an op-ed piece by Har­vard economist Martin Feld­stein, a chair­man of the Coun­cil of Eco­nomic Ad­vis­ers un­der Pres­i­dent Ronald Rea­gan, urg­ing the Fed to raise rates. The next day, the Jour­nal ran an op-ed piece by Har­vard economist Ja­son Fur­man, chair­man of the CEA un­der Pres­i­dent Barack Obama, coun­sel­ing de­lay.

Who do we want mak­ing these tech­ni­cally de­mand­ing and po­lit­i­cally cru­cial de­ci­sions? The choice is be­tween politi­cians in Congress and the White House, who are fo­cused on the econ­omy’s near-term per­for­mance; or Fed economists and of­fi­cials who are ex­er­cis­ing their “in­de­pen­dent” judg­ment about the best pol­icy to sus­tain eco­nomic growth.

The Fed isn’t in­fal­li­ble and never will be. Over the years, it’s made some colos­sal er­rors. But it beats the al­ter­na­tive of po­lit­i­cally driven poli­cies sen­si­tive to ev­ery whim from the Capi­tol or 1600 Penn­syl­va­nia Ave. One dan­ger for Mr. Trump is that the Fed, seek­ing to prove its “in­de­pen­dence,” will de­lib­er­ately op­pose what the pres­i­dent prefers.

It is in this sense that Mr. Trump would be bet­ter off if he had em­u­lated most of his re­cent pre­de­ces­sors and not ad­ver­tised his dis­plea­sure pub­licly. Go­ing pub­lic risks feed­ing a pro­longed feud be­tween Mr. Trump and Mr. Pow­ell. In­evitably, eco­nomic un­cer­tainty would in­crease, while con­fi­dence would de­crease.

“Pres­i­dent Trump has gone com­pletely off the rails with his crit­i­cism of Fed Chair Pow­ell,” says economist Mark Zandi of Moody’s An­a­lyt­ics. “[He] is us­ing the Fed as a scape­goat for any­thing that goes wrong in the stock mar­ket and the econ­omy.”

In Mr. Trump’s de­fense, he is not the first pres­i­dent to try to control the Fed and cor­rupt its “in­de­pen­dence.” Lyn­don Johnson lam­basted then-Fed Chair­man Wil­liam McCh­es­ney Martin in the mid-1960s for raising in­ter­est rates against his wishes. Richard Nixon pres­sured Arthur Burns, Martin’s suc­ces­sor, to keep rates low. Like­wise, Harry Tru­man pushed the Fed to main­tain easy money and credit.

But these and other cases oc­curred mainly be­hind closed doors. Mr. Trump’s brash in­no­va­tion has been to take his com­plaints pub­lic; the ap­par­ent aim is to in­tim­i­date the Fed into do­ing his bid­ding. If the Fed re­sists, Mr. Trump might pro­pose leg­is­la­tion curb­ing its pow­ers. That would sig­nal a real state of war be­tween Mr. Trump and the Fed, with what con­se­quences for fi­nan­cial mar­kets and the econ­omy it’s hard to know.

It is true that the Fed’s “in­de­pen­dence” is a term of art more than a strict le­gal stan­dard, as Sarah Bin­der and Mark Spin­del note in their re­cent book on the Fed, “The Myth of In­de­pen­dence.” It’s also true that at­tack­ing the Fed has long been stan­dard op­er­at­ing pro­ce­dure for mem­bers of Congress of both par­ties.

“Congress de­pends on the Fed both to steer the econ­omy and ab­sorb pub­lic blame when the econ­omy fal­ters,” write Ms. Bin­der and Mr. Spin­del. A lot of this crit­i­cism is po­lit­i­cal the­ater, de­signed to im­press vot­ers but not to do much else. What’s not fa­mil­iar is for the pres­i­dent to be lead­ing the charge.

As­so­ci­ated Press

Fed­eral Re­serve Chair­man Jerome Pow­ell

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