In retrospect, the most surprising thing about President Trump breaking the unwritten rule against presidents criticizing the Federal Reserve might be that it’s taken him this long to do it.
Trump, after all, is a self-described “low-interest-rate person” who seems to — erroneously — believe that Fed chairs just do what their presidents want. That, at least, is what he falsely accused former Fed chair Janet L. Yellen of doing during the 2016 campaign. Which is why it only seemed like a matter of time until Trump’s very open preference for lower rates came into conflict with the Fed’s gradual push for higher ones.
That’s what happened on Thursday. “I’m not thrilled” with the Fed’s rate hikes, Trump told CNBC, because “every time you go up, they want to raise rates again.” In particular, he doesn’t like the way higher rates have helped push the dollar up against other currencies — never mind that his deficit-financed tax cut is more to blame for that — since that “puts us at a disadvantage” when it comes to trade.
But this kind of norm violation wouldn’t be complete if Trump didn’t turn around and say he didn’t really mean it — only to double down on it a day later. “I am not happy” with higher rates, Trump said on Thursday, “but at the same time I’m letting them do what they feel is best.” By Friday morning, though, this slightly more conciliatory tone had turned into a diatribe against “raising rates while the dollars gets stronger and stronger.” The United States, he continued, needed to realize that “tightening now hurts all that we have done” and that it wasn’t fair for us to effectively be “penalized because we are doing so well.”
So much for the White House’s earlier insistence that “of course the President respects the independence of the Fed.”
Now, there’s a reason presidents aren’t supposed to talk about monetary policy, and that’s the 1972 election. Back then, as we now know from his tapes, President Richard M. Nixon was able to pressure then-Fed Chair Arthur Burns into cutting rates when he really shouldn’t have in the run-up to his reelection. The result was not only faster growth that helped Nixon secure a second term but also what would eventually be much higher inflation that would take more than a decade to wring out of the economy. And it’s something we still have to worry about today. That’s because lower rates are always good for a president’s short-term prospects but aren’t always for the economy’s long-term ones. The only way to solve this problem, then, is to avoid it by keeping politicians out of monetary policy to begin with.
But there’s also a more cynical reason presidents aren’t supposed to talk about monetary policy, and that’s the 1992 election. In that case, the story started out almost exactly the same — an incumbent president leaning on the Fed to cut rates — but it ended entirely differently. Instead of going along with the George H.W. Bush administration’s public and private demands for lower rates, the Alan Greenspan Fed stood firm. Probably too firm. The Fed, you see, didn’t cut rates aggressively enough to keep the unemployment rate from still going up even a year after the 1990-91 recession officially ended. Which, as Bush ruefully pointed out a few years later, is what cost him the election. The lesson was that trying to push the Fed to do something might make them less likely to do it, since looking as if they could be bullied would damage their credibility so much that it’d be harder for them to do their job.
Discretion, in other words, might be the better part of getting reelected.
It’s something Trump might learn the hard way. That’s because Fed Chair Jerome H. Powell, like Greenspan before him, seems to be made of sterner stuff. Indeed, Powell has already gone out of his way to defend the Fed’s independence from what were previously whispers that Trump might infringe on it.
The irony, though, is that Trump is right that there’s a pretty strong case the Fed should hold off on raising rates too much more. That’s not due to the fact that the dollar has gone up but rather that short-term interest rates are about to be higher than longer-term ones. That happens only when people think that short-term rates will be lower in the future than they are now — long-term rates, you see, show us what markets think short-term ones will average over time, plus a little extra to make up for the fact that inflation might end up being higher than expected — which would happen only if the Fed was going to have to cut them to try to stop a downturn. That’s why it’s just about the best recession predictor there is.
It was always a long shot that this would make the Fed stop raising rates when unemployment is so low, but whatever chance there was might be gone now that Trump has publicly called for it. The Fed doesn’t want to be seen kowtowing to him.
Maybe Trump should tell us that he really meant to say that he’s not not thrilled with higher interest rates. That should do the trick.