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Presidents Disagreeing with the Fed is Nothing New
President Trump, in his usual way of speaking, told Joe Kernan of CNBC that he doesn’t necessarily agree with the Federal Reserve’s raising of interest rates. This act, known alternatively as “moral suasion” or “jawboning,” has actually been happening for a while. Economic adviser Larry Kudlow did almost the same thing on Fox News three weeks ago.
Criticism has been coming in from many quarters, not all from the usual sources. Keith Hennessey, formerly of the Bush 43 White House, “disagree[s] with President Trump on every aspect of this.” Most of the claims are that this breaks from a long-standing tradition. But for how long? Pres. George H. W. Bush blamed Fed chair Alan Greenspan for his electoral loss in 1992, a theme that his administration began as early as 1989. President Ronald Reagan in 1981 told a group of supporters, “The Fed is independent, but they’re hurting us.” Perhaps the most famous act, done more privately, was when LBJ shoved then Fed chair William McChesney Martin around a room, shouting at him, “Martin, my boys are dying in Vietnam, and you won’t print the money I need.”
This reticence of presidents to talk about the Fed, then, is fairly recent history, started by Bill Clinton’s Treasury secretaries Robert Rubin and Larry Summers. Greenspan having enough credibility to be called a maestro probably stayed the hand of Bush 43’s staff (you might argue they needed to jawbone rates higher) and the Obama White House used breakfasts to persuade Bernanke and Yellen in private more than with public statements.
Hennessey’s article does make a very strong point though, and is the reason why we should find Trump’s statement unsurprising. Elected officials like economic expansions because incumbents are rewarded for a good economy (even if they’ve done nothing to cause it). So, rising interest rates tend to be characterized as “taking away the punch bowl just as the party gets started.” That is, elected officials always have an inflationary bias, regardless of party. Since the Fed typically has leaders with less of an inflationary bias, with more frequent spikes. (To give my bona fides and perhaps my biases, I have been writing on this topic professionally for 35 years.)
We could have a fine argument about whether the Fed is going too fast or too slow, but that’s not my point. It’s only that jawboning the Fed is an old tool in the economic policy toolbox and those acting like this is taboo have forgotten their history.
Published in Economics
What we should fear is collusion with the Fed as Nixon did with Burns. The only good to come out of that was Carter got blamed for the inflation it caused and Reagan and the Fed got credit for ending it with sound policies not collusion which subsequent Fed Chairmen didn’t learn from. Then there’s Obama and both Fed chairmen who monetized his debt and probably Trump will get blamed for the inflation that may eventually result from that.
I’m with the Fed on this. I think interest rates should go higher. Overheating is a real problem and when the inevitable downturn comes, there will be a policy lever. The EU and ECB will be in a terrible situation though.
I like the idea of presidents talking about monetary policy in public at all, one reason I’m nostalgic for the Ron and Rand Paul runs at the presidency. It looked for a while like we might return to the politics of the late 19th century, when we had goldbugs, silverbugs, bimetallic standard-bearers, and greenbackers all forming passionate (and informed) factions behind monetary policy.
Maybe we’ll get back there when the authorities inevitably crack down on crypto like they did to things like E-gold. I can hope. There’s always the chance that we’ll one day see impassioned debates about the K-percent rule or currencies backed by baskets of goods. Maybe things like Khan Academy will leave the next generation that smart.
Scott Adams discusses this tactic in his book, Winning Bigly.
Trump has probably been told that his trade war is starting to have an impact on the economy, so he is blaming the Fed ahead of time. Then, when the economy falters, he can blame the Fed. If the Fed lowers interest rates to boost the economy, Trump gets credit.
Heads I win, tails you lose.
Gee, everyone arguing their “book”. Over the years the Fed has consistently demonstrated its independence. And pig headedness. NTTAWWT
My theory, all the good results attributed to the Fed in the last 35 years have more in common with the rooster crowing up daybreak than most people realize.
The only thing worse than a politically independent Fed is a politically compliant Fed.
Apparently the world was remade when Trump won, and the things other Presidents have done, other countries have done in the past, don’t matter, all that matters is what Trump does.
I’m feeling strangely depressed today because non problems are all that fills the cable channels.
Russia Sumet over… Trump is still Trump… and still President. He’s going to magnify what many other Presidents have done, but still stay within the normal range of what Presidents do. Because… the Constitution.
There is so much positive happening and we just don’t talk about it.
So if lower interest rates boost the economy Obama must have had a fantastic run. And if high rates thwart it, Reagan’s must have tanked. Still the blame works and so does credit just not the theory.
Basic challenge in economics. It’s descriptive, not prescriptive.
I’m not so sure Trump’s actions on trade will have as large an impact as some predict. His critics make the same mistake they assign to Trump, the seen vs the unseen. How much of our GDP is tied to steel and aluminum production? This isn’t exactly the Kennedy Administration. My sole point, today’s economy is much more intricate and complex and most people who make predictions don’t have skin in the game.