Give President Trump credit – he isn’t one to kowtow to precedent. While previous Presidents have been reluctant to call out the Federal Reserve in public, preferring to criticize the Fed behind the scenes and call Fed Chairmen to the carpet privately, Trump is taking his campaign against the Fed public. It’s just too bad that he’s taking the Fed to task for the wrong reason.
Trump is upset that the Fed is hiking interest rates after nearly a decade of near-zero interest rates. Yes, raising interest rates will tend to depress business activity, but interest rates are still well below long-term averages. If the Fed raising interest rates back to more normal levels will push the economy into recession then the economy isn’t all that strong to begin with. Better to get the recession underway, clear out bad debts, and let the economy return to normal than to continue using easy money and cheap credit to keep up the illusion of prosperity.
But political considerations won’t allow the President to allow that to happen, as a recession would wreak havoc on his reelection chances. And so we’re treated to the spectacle of the one-time Fed critic who said Janet Yellen should be ashamed of herself now calling on Fed Chairman Jay Powell to engage in the same policies as Yellen did. It’s a disappointing about-face but an understandable one. Now the only question is whether Powell will give in to the President or not.
The Fed is widely expected to raise its target federal funds rate again in December. If it doesn’t, it would be an indicator that Trump has put enough pressure on Powell to get the Fed to change its policy. The path forward is a big unknown, as many had speculated that the Fed would probably try to overshoot to the high side with its interest rate increases. If Trump’s pressure is successful, then expect the target federal funds rate to stay below 3 percent next year. There are still a lot of unknowns, and a lot of potential headwinds that could affect the Fed’s decision-making, but it will be interesting to see just how independent the Fed really is.
This article was originally posted on Red Tea News.
