We are still in the early stages of what we expect will be Trump’s escalating outrage that the FOMC tightening is undermining his fiscal stimulus.1(See our Thursday commentary for our take on Trump’s comments in his interview with CNBC.) Indeed, that’s the partial purpose of such tightening. And the tightening will risk a recession, as is always the case. That’s the “navigating” story that Powell emphasizes. Quite a challenge!
Successive outbursts from Trump should have diminishing returns. We are fully confident that Trump’s tweets will not affect FOMC decisions.
But Trump’s policy actions do affect monetary policy. Before Trump’s policies, the FOMC was already on a course to raise rates toward neutrality. But Trump’s fiscal stimulus has led the FOMC to tighten faster and further. He put the FOMC behind the curve, which never ends well.
In addition, U.S. presidents always have an opportunity to change the course of monetary policy via their nominations to the Board. Trump had the opportunity to shape that course dramatically because he was able to nominate many governors, including the Chairman and Vice-Chairman. His choices so far, including both his confirmed appointees (Chairman Powell and Vice Chairman for Supervision Quarles) and outstanding nominees (Vice-Chairman Clarida, Governors Bowman, and Goodfriend), will leave the Board with outstanding personnel–and not a single one beholden to Trump. Additionally, the New York Fed selecting President Williams also strengthened the core policymaking group.
On the U.S. dollar, Trump clearly sees the consequences for the trade of the U.S. having higher prevailing interest rates and a stronger currency. However, this is a direct reflection of differences in the outlook and monetary policies here and abroad, as well as expectations about Trump’s trade policies. So, in some sense, Trump is exacerbating the outcome that enrages him.
Trump is also setting up the Fed to take the blame if there is a recession. Of course, the cause of the recession might be FOMC tightening. Still, the Fed will carry out its responsibilities as an independent central bank, immune to the outbursts of the president. Try to ignore Trump’s outbursts. Count on the Fed to do so. 1 Tweet on Friday, July 20: “China, the European Union, and others have been manipulating their currencies and interest rates lower, while the U.S. is raising rates while the dollars gets stronger and stronger with each passing day – taking away our big competitive edge. As usual, not a level playing field…The United States should not be penalized because we are doing so well. Tightening now hurts all that we have done. The U.S. should be allowed to recapture what was lost due to illegal currency manipulation and BAD Trade Deals. Debt coming due & we are raising rates – Really?”