Trump Flunks Fed Politics

Bashing Jay Powell makes it harder to keep interest rates low.

By The Editorial Board

President Donald Trump looks on as Jerome Powell, his nominee to become chairman of the U.S. Federal Reserve, speaks at the White House in Washington, November 2, 2017.
President Donald Trump looks on as Jerome Powell, his nominee to become chairman of the U.S. Federal Reserve, speaks at the White House in Washington, November 2, 2017. Photo: carlos barria/Reuters

Donald J. Trump is a real estate man, so naturally he prefers low interest rates. But he’s also President, and publicly mau-mauing the Federal Reserve to keep rates low as he has been doing will lead to the opposite of what he wants. This is Fed Politics 101.

“Every time we do something great, he raises the interest rates,” Mr. Trump said Tuesday in an interview with our Journal colleagues, referring to Fed Chairman Jay Powell. “He was supposed to be a low-interest-rate guy. It’s turned out that he’s not.”


Now, who would say such a thing about Mr. Powell? None other than Mr. Trump’s Treasury Secretary, Steven Mnuchin, who supervised the Fed Chairman’s selection in 2017. As we reported at the time, Mr. Mnuchin told Mr. Trump to select Mr. Powell in substantial part because he could be more easily influenced than other candidates. Mr. Trump could have taken other advice.

The truth is that no Fed Chairman can afford to be seen by markets to be taking interest-rate dictation from the White House, and when they do it typically ends in tears. See Arthur Burns under Richard Nixon and G. William Miller under Jimmy Carter. Alan Greenspan and Ben Bernanke were also too cozy politically with administrations in power, but that influence was mostly behind the scenes.

Poor Mr. Powell has the harrowing task of managing the transition from the largest experiment in monetary-policy history. Mr. Bernanke and later Janet Yellen enjoyed the ride down to near-zero short-term rates and unprecedented bond-buying to keep long-term rates artificially low. The policy pushed investors into riskier assets such as stocks even though it didn’t do much for a real economy that grew slowly during the Obama Administration.

Growth and animal spirits have revived with Mr. Trump’s policy mix of tax reform and deregulation. Now Mr. Powell has to manage the more treacherous monetary road back to normalcy, and Mr. Trump’s public battering won’t make the Chairman’s job any easier. The Fed has signaled it will raise short-term rates again in December, the fourth time this year. Mr. Powell won’t want to look like he’s backing down under political pressure—even if economic events suggest he should.

A better criticism of the Fed would be that it should have unwound its massive bond portfolio first and faster than it has. That would have loosened the Fed’s control over the long-term bond market, encouraging an earlier adjustment out of risk assets before the Fed also began raising rates.

Now the Fed is doing both at the same time, with more risk for asset prices and greater political risk for the Fed. See Wednesday’s rout in equity prices that are now near the formal correction territory of a 10% decline in recent weeks.

Shrinking the Fed’s bond portfolio first and more rapidly is the policy that former Fed Governor Kevin Warsh recommended before Mr. Trump considered him as a finalist for the Fed Chair along with Mr. Powell. But Mr. Mnuchin preferred Mr. Powell, and the President went along with “a low-interest rate guy.”

Fed politics aside, the substantive question is whether Mr. Trump is right that the central bank is too tight. We’ve thought not to this point, as short-term rates are still at or below the rate of inflation. Rates should rise from their historic lows in an economy that is growing by nearly 4%.

Yet there are some signs of slower growth, in particular in housing. New single-family home sales fell 5.5% in September and are down 13.2% from a year ago. Some of this is hurricane-related but housing affordability is also an issue as mortgage rates rise. Business and consumer confidence are still high but are worth watching if stock and other asset prices continue to fall.

The bigger economic risk is slower growth abroad, which Mr. Trump should care about though he professes not to. Faster U.S. growth and rising interest rates are drawing capital from other markets. Mr. Trump’s tariffs are also hurting trade flows and causing companies to delay some investment. Border taxes are never a free lunch, no matter what White House adviser Peter Navarro tells Mr. Trump.

White House economics chief Larry Kudlow says Mr. Trump is merely offering his opinion on the Fed, not issuing an order to Mr. Powell. No doubt the President is also deflecting blame from the White House for any economic slowdown. Mr. Trump needs a foil more than even most politicians. All of which is good reason for the Fed to ignore the President and focus on getting its policy right—whether or not that means raising rates in December.

0 comentarios:

Publicar un comentario