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.


Fed Chair­man Jerome Pow­ell look­ing over his notes.

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