While past administrations have at times subtly hinted displeasure at a rate hike, it has never been a feature of the executive branch to openly and publicly hammer away at the Federal Reserve with constant appeals for a change in policy. What we are seeing from this president is truly unprecedented. And many on Wall Street and across the aisle in Congress are up in arms at the sense of a breach of the unwritten rule that the White House is simply not supposed to get involved in the Fed’s job.
However, we have a very different take on this dynamic.
While the Fed just cut rates on Wednesday despite a stock market at all-time highs and unemployment at all-time lows, there is every indication that the move had utterly nothing to do with pressure from the Trump White House. The Fed is working hard to avoid the “Japanization” of the US economy – where consumers and lenders become inured to lower rates of inflation, whether in good times or bad, to an extent that allows for a fixing of long-term inflation expectations well below 2%. That process risks a growing impotence of monetary policy tools and an eventual structural stagnation of the economy at well below-trend levels with no means of escaping the antlion’s den.
But the President will almost certainly continue to chirp and tweet about a too-tight Fed no matter what Fed Chair Powell does over coming months.
The reason is not that Mr. Trump actually believes he is able to bully the Fed into policy moves, but because he is laying the groundwork, quite astutely, for a potentially necessary debate strategy next fall.
According to economists far and wide, the current cyclical expansion in the US is well beyond any reasonable expectation for duration or lifespan. It is living on borrowed time. And, as was so clearly outlined in the 1992 election, winning the presidential nod is all “about the economy, stupid!”
Hence, Trump is hedging against the possibility that he will be forced to mount a presidential campaign amid a recessionary economy in late 2020 – something that, under normal circumstances, would just about guarantee an unwinnable campaign context. However, Trump’s strategy, we believe, is to create a narrative that an irresponsible Federal Reserve, with a Chairman he wanted to fire, completely botched the job and sank the US economy.
In other words, Trump is using the narrative of “being accused of infringing upon the independence of the Fed” as a device to avoid “being accused of contriving a gigantic economic straw man” for when we inevitably see the economy weaken more substantially.
The important point here is that no one on the planet (other than Trump) has even remotely suggested that the Fed is “irresponsibly tight” with monetary policy. That narrative isn’t “a thing”. But the President is working hard right now (and probably effectively) to make it something he can refer to as “a thing” a year from now on the debate stage in the event the cycle has rolled over in front of the election.
“You remember how everyone was talking last year about how the Fed set rates too high! Even I was tweeting about it. Everyone saw how bad they missed the mark. They broke the economy!”