On the eve of Wednesday’s Fed decision, President Trump is once again bashing the Federal Reserve over its plans to raise interest rates at a time when markets are already in chaos and the “world is blowing up” thanks in part to the central bank’s “double-barreled blitz” of higher rates and tighter liquidity.
But instead of insinuating that Fed Chairman Jerome Powell is trying to undermine the administration, the president ticked off a reasonable list of factors that should give a truly “data-dependent” Fed reason to reconsider.
Instead of moving ahead with more rate hikes, Trump said the Fed should “Take the Victory!” Trump said.
It is incredible that with a very strong dollar and virtually no inflation, the outside world blowing up around us, Paris is burning and China way down, the Fed is even considering yet another interest rate hike. Take the Victory!
— Donald J. Trump (@realDonaldTrump) December 17, 2018
Trump’s Monday tweet follows a widely discussed op-ed published by investor Stanley Druckenmiller and former Fed Governor Kevin Warsh, who became the latest establishment heretics to side with President Trump over the economic establishment by urging the Fed to stop raising interest rates – for now, at least – due to “recent economic and market developments.” The two authors wrote that the Fed should have stopped QE years ago before the easy money policies helped blow a massive asset-price bubble that could collapse as liquidity is withdrawn and borrowing costs are raised.
In a first-best world, the Fed would have stopped QE in 2010. It might then have mitigated asset-price inflation, a government-debt explosion, a boom in covenant-free corporate debt, and unearned-wealth inequality. It might also have avoided sowing the seeds of future financial distress. Booms and busts take the Fed furthest from its policy objectives of stable prices and maximum sustainable employment.
In a second-best world, on Mr. Powell’s arrival in February 2018, the Fed would have shrunk its balance sheet with speed and determination before raising rates. The economic expansion was still gaining traction at home and abroad. Tax and regulatory reforms were jolting the supply side of the economy from its slumber. Accelerated Fed QT, in the absence of rate rises, would have been much less disruptive to the real economy. Asset prices could then have found a more durable equilibrium and laid a stronger foundation for future growth.
The time to be dovish was when the crisis struck and the economy needed extraordinary monetary accommodation. The time to be more hawkish was earlier in this decade, when the economic cycle had a long runway, the global economy ample momentum, and the future considerably more promise than peril.
This is a time for choosing.
We believe the U.S. economy can sustain strong performance next year, but it can ill afford a major policy error, either from the Fed or the rest of the administration.
Given recent economic and market developments, the Fed should cease – for now – its double-barreled blitz of higher interest rates and tighter liquidity.
Powell himself recently acknowledged that Trump might have a point by shifting his rhetoric to note that the Fed funds rate is just below the policy range, and the market is increasingly in Trump’s camp – expects just 10bps of rate hike in 2019 and expects 10bps of rate cuts in 2020.
Though some were still eager to pin the selloff on Trump and his ‘irresponsible’ fiscal policies.
The President just doesn’t know when to let go when it comes to his attacks on the Fed. He just ran up the biggest fiscal deficit on record for a November ($205 bn) but somehow this is all on Powell.
— David Rosenberg (@EconguyRosie) December 17, 2018