President Trump’s continuing attempts to stop the Justice Department from doing what he doesn’t want it to has an economic lesson for us, as well: The Federal Reserve is next.
The simple story here is the Fed is raising rates more than Trump would like, and it seems like a matter of time until his escalating war of words against it turns into action. Trump, after all, has already gone from saying he’s “not thrilled” with what the Fed is doing to being “very unhappy” about it to considering it to be the “biggest risk” to the economy. So you don’t have to read between the lines when Trump says, as far as he’s concerned, the Fed is independent only “in theory."
This, of course, is only going to get worse the closer we get to the 2020 election. There are two reasons for this. The first is the Fed has given every indication that it’s going to keep increasing interest rates at the same slow and steady pace it has set for the past two years. While it didn’t raise them at its meeting Thursday, it made a point of reiterating more rate hikes are coming soon. Why wouldn’t they? Trump pushed a $1.5 trillion deficit-financed tax cut for corporations into the economy at a time when unemployment was already 4.1 percent. That has forced the Fed to raise interest rates more than it was going to, so it might not be long before rates are up to about 3 percent or even higher.
That might not sound like much, and it’s not by historical standards, but it is by our current-day ones. Interest rates are still zero in both the euro zone and Japan. That means investors can do a lot better putting their money in U.S. Treasury bonds than in, say, German ones — and when they do, the dollar goes up. Quite a bit, in fact. Consider this: Since the start of the year, the dollar, on a trade-weighted basis, is up 7.6 percent against a broad basket of currencies and is near a 20-year high.
That’s the second reason Trump’s fight with the Fed is going to get a lot uglier. A stronger dollar hurts two of the things he talks about most on the economy: the trade deficit and factory jobs.
It’s fairly straightforward: The higher the dollar gets against other currencies, the more our exports cost in other countries. So they will buy less of what we make — particularly manufactured goods — and we’ll buy more of their cheaper goods. This isn’t necessarily an economic problem, but it can be a political one. At least it was for Democrats in 2016. That was the last time the dollar got this high, and the result was a localized blue-collar recession that might have helped tilt pivotal Rust Belt states to Trump.
Trump is going to keep feeling threatened by the Fed. As we’ve seen, he doesn’t let things like norms get in the way when he feels threatened — especially before an election. He’ll fire or push out whomever he has to, even if they’re supposed to be independent. That was the case with the FBI director and the attorney general, and it could become the case with Fed Chair Jerome H. Powell. That said, there is a difference here: Justice Department officials are only unofficially independent, while the Fed chair is as a matter of law. The head of the Fed can be fired only “for cause,” which generally isn’t considered to include policy disagreements. That’s the kind of thing that would need to be enforced by the courts.
Would they? Good question.
In the meantime, you might want to pay extra attention to anyone on television who says the Fed is raising rates too fast. There’s a good chance Trump will be.