President Trump has repeatedly and very publicly criticized the Chairman of the Federal Reserve—a man he appointed—for not doing a satisfactory job.
It is something rarely done by a president, but Trump isn’t one to play by the conventional playbook.
On Wednesday, Trump tweeted the following:
“Our problem is a Federal Reserve that is too proud to admit their mistake of acting too fast and tightening too much (and that I was right!) They must cut rates bigger and faster, and stop their ridiculous quantitative tightening NOW. Yield curve is at too wide a margin and no inflation! Incompetence is a terrible thing to watch, especially when things could be taken care of sooo easily.”
Trump has been on an anti-Jerome Powell Twitter-storm lately.
He criticized Powell for cutting interest rates—which he had been calling on him to do for months— for not promising more rate cuts in the future. Bloomberg reported that “On the same morning Fed officials began a two-day policy meeting, Trump tells reporters he wants a large cut for the central bank, adding his demand that the Fed halt balance sheet runoffs immediately. I’m just very disappointed in the Fed.”
On July 22, he said, “It is more costly for the Federal Reserve to cut deeper if the economy actually does, in the future, turn down. Very inexpensive, in fact productive, to move now. The Fed raised &tightened far too much &too fast. In other words, they missed(Big!) Don’t miss it again!”
On July 26, he tweeted, “that 2.1% GDP growth in the second quarter is not bad considering we have the very heavy weight of the Federal Reserve anchor wrapped around our neck.”
That Begs The Question: Is Trump Right?
There has been an ongoing debate for decades over how much independence the Federal Reserve should have relative to the political process. There are legitimate arguments on both sides. The Fed operates in a unique orbit between some government oversight and its own entity. The subject of just how much government oversight—or lack thereof—is required has been the focus of the debate.
The former head of the Federal Reserve Bank of Minneapolis, Bruce K. MacLaury, once wrote, “independence does not mean decisions and actions made without accountability. By law and by established procedures, the Federal Reserve System is clearly accountable to Congress—not only for its monetary policy action but also for its regulatory responsibilities and for services to banks and to the public.
Nor does independence mean that monetary policy actions should be free from public discussion and criticism—by members of congress, by professional economists in and out of government, by financial, business, and community leaders, and by informed citizens. Nor does it mean that the Federal Reserve is independent of the government. Although closely interfaced with commercial banking, the Federal Reserve is clearly a public institution, functioning within a discipline of responsibility to the public interest. It has a degree of independence within the government which is quite different from being independent of government.”
A counterargument to that would be that political influence would be unsatisfactory given the short time horizons that politicians have compared to the long-term effects of monetary policy.
Translation: Politicians only care about improving the economy in the short-term to get elected.
R.W. Hafer wrote, “it is commonly agreed that price stability or a low-inflationary environment is a key goal of monetary policy. Indeed, some argue that is the only goal that, in the long run, the Federal Reserve or any other central bank can actually achieve. If this is true, monetary policymakers must take a long-term outlook to setting policy.”
That Brings Us Back To Our Original Question…
Are Trump’s attacks justified?
He certainly has the right. The Federal Open Market Committee are not deities sent to us from central bank heaven.
However, Trump is wrong in his criticism of the Fed.
Monetary policy dictates that after a long expansionary period, central banks should raise rates to prevent the economy from overheating. Inflation has stayed relatively low and flat, and the economy is relatively strong.
Trump seems to not understand this basic monetary policy, and he is looking at it from a short-sighted political standpoint. He believes that lower interest rates will stimulate the economy thereby improving his re-election efforts.
Also, if the economy is still strong—which it is—he shouldn’t feel the need to call for rate cuts.
His economic policies have been successful in growing the economy, so there is no need to beat the Fed over the head.
I don’t say that as a fan of the Fed. I believe that the institution should face more accountability or possibly be ended.
However, the FOMC has been following standard monetary policy expertise, contrary to what President Trump says.
He is free to criticize the Fed, however, his criticism in this instance lacks an understanding of basic economics.