Today, President Trump criticized the Fed’s recent pace of rate hikes.1It is rare for a sitting U.S. president to explicitly opine on monetary policy, particularly concerning the current Fed Chairman. Trump acknowledged he was breaking with tradition by commenting but did not regard expressing his opinion as inappropriate as he saw his remarks as consistent with his other economic policy views. Shortly after Trump’s remarks were made public, the White House made an effort to clarify (walk back) Trump’s remarks: “Of course the President respects the independence of the Fed. As he said he considers [Powell] a very good man and that he is not interfering with Fed policy decisions.”
The crux of Trump’s argument had two interlinking aspects:
1. The FOMC’s pace of rate hikes makes the dollar appreciate against the currencies of Europe and China. Hence, the U.S. is at a disadvantage versus its trading partners.
2. The FOMC’s rate hikes offset the positive effects of fiscal and trade policy. So the visible positive effects of White House policies are attenuated.
On exchange-rate concerns, the FOMC sees dollar policy as the preserve of the U.S. Treasury but considers the exchange-rate consequences of its actions because they are relative to the dual-mandate concerns of maximum employment and price stability.
As for the FOMC countering fiscal stimulus, that’s the FOMC’s job! Once the FOMC has set a course of policy consistent with their desired outcome for unemployment and inflation, they will, of course, respond to offset any shock (including fiscal policy) that would alter the economy’s course. Newtonian monetary policy: For every action, there is an equal and opposite reaction.
Trump is unhappy about the pace of rate increases, but he brought this upon himself with the fiscal stimulus, which put the FOMC behind the curve and has forced them to go faster and further than they otherwise
1 Unofficial transcript of remarks: “I’ve put a very good man in the Fed. I don’t necessarily agree with it, because he’s raising interest rates I’m not saying I agree with it, I must tell you, I don’t. I’m not thrilled because, you know, we go up against everything we go up they want to raise rates again. And I don’t really–I am not happy about it. But at the same time, I’m letting them do what they feel is best. But, I don’t like all of this work that goes into doing what we’re doing. You look at the euro, you look at what’s going on with the EU, and they’re not doing what we’re doing. And we already have somewhat of a disadvantage–although I’m turning that into an advantage. You know, last year–and for years–we’ve been losing $150 billion with the EU nations, with the European Union, And, they’re making money easy and their currency is falling. China–their currency is dropping like a rock and our currency is going up. I have to tell you: It puts us at a disadvantage. I’m just saying the same thing that I would have said as a private citizen. So somebody would say, ‘Oh, maybe you shouldn’t say that as President.’ I couldn’t care less what they say, because my views haven’t changed. I don’t like [that] all of this work we’re putting into the economy and then I see rates going up; I see China, where they’re–I mean, look at what’s happening with their currency. It’s dropping like a rock.”
would have. That is the reason the FOMC sees increased tension between (1) going too slow and having inflation be higher than acceptable and (2) going too fast and precipitating a recession.
What we don’t have to wonder is how Trump’s comments will affect the course of policy. They won’t.
Chairman Powell and the current FOMC, as well as their predecessors going back decades, have viewed the Fed’s institutional independence from political pressures as the bedrock of effective monetary policy in support of the Congressional mandate.
The comments could affect communication by the Chairman, however. First, he’ll be more likely to emphasize the importance of independence every time he talks and be even more careful to steer clear of politically sensitive topics.
On trade policy, Powell recently expressed approval for the Administration’s stated aim of seeking lower tariffs for everyone, and he neither supported nor opposed the Administration’s strategy for achieving that objective.
On fiscal policy, he has stayed clear of politically sensitive issues, but he has been willing to say what the Committee has said: There is expected to be a positive impact over the next few years, but the timing and size of those effects are highly uncertain and the Fed looks at a wide range of estimates. He declined to endorse a recent study (from a San Francisco Fed publication) that questioned the likely positive economic impact of the tax bill.
Policy-wise, the FOMC will not give a thought to comments from the White House or the President. As Powell stated, it will concentrate on “carrying out the mandate [Congress has] given us.” The preponderance of economic data clearly indicates that risks to the inflation outlook are “roughly balanced” and the labor market is “close to full employment,” suggesting a continued need for gradual rate hikes. Only surprises in the incoming data and changes in the evolving forecast will alter the Committee’s judgment about the appropriate course of monetary policy.