I can imagine Donald Trump sitting, watching news of the latest Federal Reserve interest-rate increase, his anger becoming uncontainable. Slamming down the remote control so hard that the battery cover flies off and bounces across his desk in the Oval Office, the President jumps to his feet and punches a frustrated fist into his palm.
“Who the hell told Jay Powell to raise rates again?” he demands from his entourage of advisers.
A voice at the back (in my imagination, the President actually has a few reasonably intelligent advisers who are brave enough to give him honest answers) speaks up:
“You did, Mr. President.”
“You’re fired,” the former host of The Apprentice replies.
Certainly in his words, Mr. Trump never expressly advised the Fed or the chairman he appointed, Mr. Powell, to raise rates. But his actions speak much, much louder than his words ever will to an independent body such as the Fed. And Mr. Trump’s policies have dictated, loudly and clearly, that the Fed raise rates.
By slashing taxes at a time when the U.S. economy was already growing strongly and had essentially reached full employment, the Trump administration injected substantial stimulation to an economy that was already well and truly stimulated. The Fed did what any right-minded central bank would do: it raised rates, in order to remove some of the economic stimulus it was providing through low borrowing costs, and thus keep the economy on an even keel.
It’s important to remember that it’s not the Fed’s job to help this president, or any other president, maximize economic growth – as much as Mr. Trump might wish it were. Rather, the Fed is charged with a dual mandate of maximizing employment while maintaining stable inflation (its objective is 2 per cent, the same as the Bank of Canada’s target).
U.S. employment is already pretty much maximized; the unemployment rate hit an 18-year low in May. The 12-month inflation rate hit 2.9 per cent in June, a six-year high. In an economy already near its peak and under increasing capacity pressures that are by their nature inflationary, Mr. Trump’s tax stimulus effectively turned up the pressure. In order for the Fed to do its job, Mr. Trump had created the conditions that absolutely dictate rate hikes. It’s Central Banking 101.
Mr. Trump is right that, by raising interest rates faster than most of its international peers, the Fed is putting upward pressure on the U.S. dollar, which does detract somewhat from the attractiveness of U.S. exports. But the central bank’s job is absolutely not to steer the U.S. dollar downward in order to support the president’s agenda. And when an economy is outperforming those of its competitors, as the U.S. economy is, that would imply a stronger currency regardless of the trend in interest rates.
Meanwhile, Mr. Trump’s own protectionist trade policies are weighing on the currencies of U.S. trading partners who are under attack and face further threats – again, boosting the relative strength of the U.S. dollar. If Mr. Trump perceives this as a problem, it’s one of his own making.
Let’s keep in mind that even with its rate hikes, the Fed’s key rate, the federal funds rate, remains in a decidedly modest range of 1.75 per cent to 2 per cent. This is still below what is generally considered even a neutral level for interest rates, let alone one that is designed to actually slow an overheated economy. The Fed is still effectively giving Mr. Trump’s economic acceleration a boost. It’s merely prudently easing off its monetary gas pedal, in light of the President stepping down on his fiscal one.
For a president to say otherwise is, frankly, dangerous and irresponsible. The Fed’s capacity to use rate policy to maintain a stable and strong economy requires, among other things, the confidence of financial markets and consumers that it is following sound policy based on clear, well-established objectives, free from political influence. To mess with that, by publicly questioning its actions, is to undermine the effectiveness of its policy moves.
Mr. Trump might not like that the Fed isn’t there to do his bidding for him, and he may not like where interest rates are going, or how they are affecting the U.S. dollar. But he created this situation. For the good of the strong economy that he claims to care so much about, he’ll have to learn to happily live with it.