The Federal Reserve should stop trying to offset the economic costs of President Trump’s trade war and instead force him to bear the consequences of the most aggressive use of tariffs since the 1930s, according to the former president of the Federal Reserve Bank of New York.
“Officials could state explicitly that the central bank won’t bail out an administration that keeps making bad choices on trade policy, making it abundantly clear that Trump will own the consequences,” William Dudley, who stepped down last year after nine years as the head of the New York Fed, wrote in an opinion column for Bloomberg.
In an extraordinary broadside, Dudley said the Fed also should consider how its actions will affect the 2020 presidential election since, “Trump’s reelection arguably presents a threat to the U.S. and global economy, to the Fed’s independence and its ability to achieve its employment and inflation objectives.”
The veteran policymaker quickly drew fire on social media from across the political spectrum. On Twitter, Dan DiMicco, former chief executive of Nucor and a leading backer of Trump’s protectionist stance, likened Dudley’s call to “rooting for the Germans in WW2 (and) wanting the USA to lose.”
Jared Bernstein, a former economic adviser to Vice President Joe Biden, tweeted that Dudley’s recommended course “could easily backfire as Trump often doubles down when challenged like this. Far too risky a play, in my view.”
An economist who worked at Goldman Sachs for more than two decades before joining the Fed, Dudley is now a senior research scholar at Princeton University.
His remarks ignited a fierce debate Tuesday over how the Fed should navigate the treacherous economic and political waters it faces.
Federal Reserve Chair Jerome H. Powell last month cut the benchmark U.S. interest rate by a quarter percentage point to mitigate a global growth slowdown he blamed, in part, on the president’s unconventional trade policies.
Powell stressed that the Fed took no position on Trump’s imposition of tariffs on imports from China and several other nations. But uncertainty resulting from the president’s on-again, off-again threats of additional trade barriers was depressing business investment and sapping manufacturing activity around the world, he said.
Dudley suggested that the central bank’s actions were encouraging the president “to escalate the trade war further, increasing the risk of a recession.”
The bank, he wrote, should not “play along” with Trump’s trade policy overhaul.
The president’s series of planned tariff hikes by Dec. 15 will lift the average U.S. tariff on Chinese goods to more than 24 percent compared with just 3 percent when he took office, according to Chad Bown, an economist with the Peterson Institute for International Economics.
The cost of those tariffs “has fallen largely on the U.S.,” in the form of smaller profits for importing companies and higher prices for consumers, according to a new paper by economists from Harvard University, the International Monetary Fund, the University of Chicago and the Federal Reserve Bank of Boston.
If Powell ruled out further rate cuts to address trade war fallout, he would discourage the president from additional risky escalation, demonstrate the Fed’s independence and preserve the bank’s ability to cut rates if the economy tips into recession, Dudley said.
In response to questions, the Fed rejected the former official’s call to steer the economy with one eye on the political calendar.
“The Federal Reserve’s policy decisions are guided solely by its congressional mandate to maintain price stability and maximum employment. Political considerations play absolutely no role,” said Michelle Smith, a Fed spokeswoman.
Though he appointed Powell to a four-year term in 2017, Trump has grown relentlessly critical of the Fed chairman for keeping interest rates higher than those of key U.S. trading partners, including in Europe.
A few hours after Dudley’s column appeared, the president tweeted his latest attack on the nation’s central bank. “The Federal Reserve loves watching our manufacturers struggle with their exports to the benefit of other parts of the world,” Trump wrote. “Has anyone looked at what almost all other countries are doing to take advantage of the good old USA? Our Fed has been calling it wrong for too long!”
On Friday, Trump labeled Powell “an enemy” of the United States for failing to cut rates more quickly.