Politicians should not be in charge of Federal Reserve
I will give it to President Trump that he understands economic stimulus. There are essentially three kinds of economic stimulus: fiscal stimulus, regulatory stimulus and monetary policy. His tax cut was, of course, the fiscal kind. On the regulatory front, perception is as strong as reality and Trump oozes the perception that he cuts red tape. Each of these he controls and it has been driving him crazy that he doesn’t control monetary stimulus in this country because of the independence of the Federal Reserve which sets monetary policy. He has been complaining about the Fed increasing interest rates for over a year, lambasting Fed Chairman Jerome Powell in particular, even going so far as to let it be known that he will not reappoint him Fed Chairman when his term is up. In fact, he wanted to fire or demote him until he found out that was too difficult, and would prompt another crisis of government and confrontation with the Senate. He relented to “being stuck with him”.
Trump blames the Fed increasing interest rates for slowing what otherwise would be a higher rate of GDP growth. There is an argument to be made that Trump is right on this. Fed hikes in short term interest rates have caused a flattening of the yield curve (short term rates relative to long term rates) that may have been overdone. The Fed was worried about over-heated job growth and increasing inflation and may have stomped down on them a little too hard. One could also argue that Fed policy was successful in controlling inflation during a period of strong growth.
Trump is challenging the independence of the Fed arguing that he would have done a better job with monetary policy. He also laments that leaders in other countries control their central banks which puts him at a disadvantage in currency management and trade issues. There has been good reason born out over time why politicians should not be put in charge of the Federal Reserve. The institution should be insulated from politics or its power would be abused. There would be easy money ahead of every election were the incumbent president in charge of the Fed. Ultimately this would lead to catastrophic consequences.
The Fed makes mistakes but they are smaller than the ones that politicians would make. This would be like handing a 6-year-old a loaded-cocked revolver. DJT attempted to sandbag the Fed by trying to appoint a couple sycophants to the Fed board but the U.S. Senate thankfully rebuffed the unqualified proposed appointees which gave the banks a sense of relief. Trump will not give up though. The Federal Reserve is an institution which overall has performed well. It has kept us from a second great depression in the past decade and set the groundwork for what has been the longest economic growth period in our history. Believe me, neither Congress nor any President gets the most credit for that. It was primarily the Fed. While Donald gets credit for his tax cut stimulus he is also standing on the U.S. and Global economies with his tariffs and trade wars.
Tariffs function economically as tax increases which slow growth. Trump knows that. He also knows that he is not going to get any further fiscal stimulus from this Congress. That is why he has been pounding so hard on the Fed trying to jawbone and threaten them into easing rates. He needs monetary easing in order to buffer the negative impact of his trade wars. Ironically, the Fed is prepared to buffer slowing growth so is not that out of line with Trump on lowering rates again under these circumstances. They will go slower than Trump in easing.
He is looking at the 2020 election cycle as his motivation for easy money to boost the economy. The Fed doesn’t respond to elections and is not supposed to. The fear now is that if Trump is re-elected, that the next Fed Chairman will be a sycophant just as Attorney General Barr turned out to be. A Trump Fed Chairman will talk about defending Fed independence but hand the reins of the Fed to Trump. That will be a great economic risk.
ECB Central bank head, Mario Draghi, indicated that the ECB would rollout some fresh stimulus to buffer slowing economic activity there. That made Trump angry. He sees it as a means to lower the value of the euro relative to the dollar to make the EU more trade competitive against the U.S. He is getting too deep into the weeds seeing currencies as tools to fight a trade war. The markets set currency values which are determined by more than just short-term rates. Long term interest rates give a better outlook for the economy than short-term rates do.
Trump blasted Draghi but if ECB rates fall, the more chance that ours will too. The coordination of global central banks with monetary policy has been one factor responsible for the long period of global economic growth. They all ease when there is a financial crisis and coordination has been responsible for buffering a global recession.
Trump thinks ‘America First’ but pursuing a national monetary policy could result in the next global depression. Draghi, I believe correctly, outlined the risks facing the ECB, one of which is Trump’s trade war and acknowledged that they may have to re-start QE again. Trump responded that this was “unfair”. One can imagine the form that his trade war will take with the EU. Trump is just biding his time until he goes after the EU expanding his attack to another trade partner. He would love to have control of monetary policy so that he could add stimulus to the U.S. economy while he was damaging the global one.
David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.
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