Which brings us to the effect of President Trump’s policies on the recent economic outlook, particularly his repeated, unpredictable threats to impose tariffs on various trading partners, most recently Mexico. So far, trade wars do not seem to have affected broad indicators such as inflation or unemployment. They do, however, constitute a source of instability and uncertainty that may be chilling or distorting investment decisions, both here and abroad. If fully enacted, the tariffs Mr. Trump threatened on Mexico could cancel out, through higher costs for consumers, the modest tax cut for the middle class that Republicans enacted in 2017.
This poses a dilemma for the Fed and its perceived insulation from politics: Rate decisions may be interpreted as responses to Mr. Trump’s trade gyrations that make them either more or less bearable for the economy. The Fed’s chair, Jerome H. Powell, observed at a May 1 news conference that “reports of progress in the trade talks between the United States and China” were among several factors that might enable the Fed to exercise “continued patience” regarding a rate cut — which implies that the subsequent collapse in trade relations is a reason to go ahead with a reduction.
To make Mr. Powell’s predicament worse, Mr. Trump often scapegoats the central bank when negative economic news happens: “I think the Fed has gone crazy,” he said in the wake of a stock market plunge last October.
For the Fed chair, the only way out of this situation is through; he and his colleagues must simply tune out the president’s rhetoric and judge the economy based on its objective condition, even if that condition is shaped in part by bad policy. To be sure, the data have been sending ambiguous signals of late. A number of economists believe that, acting on a reasonable view at the time, the Fed actually raised rates a bit too fast, too soon, during 2018. The upshot is that there is an argument to be made that Fed policy is, at present, too tight. Therefore, the Fed would not be wrong to compensate by cutting rates now — even if that also happens to be what Mr. Trump is demanding. It may provide, as St. Louis Fed President James Bullard noted, “some insurance in case of a sharper-than-expected slowdown.”
The point is that the Fed must pursue its mandate — price stability and full employment — regardless of what the critics, whether the man in the White House or those who would accuse the Fed of serving the man in the White House, may say. The best way for the United States’ central bankers to ensure the Fed’s reputation for objectivity and independence may be to behave as if they don’t care about it.