Trump has made it harder for the Fed to do the right thing

President Trump really wants the Federal Reserve to cut interest rates. He’s repeatedly accused the central bank of holding back economic growth and undermining his trade war with China. After the Fed paused its rate increases in January, Trump demanded rate cuts, and threatened to put at least two forthright cronies on the Fed board. Just this Monday, Trump went on CNBC and attacked the central bank again: “They certainly didn’t listen to me because they made a big mistake. They raised interest rates far too fast.”

The markets seem to think Trump will get what he wants. They’re currently pricing in a 70 percent chance the Fed will reduce interest rates in July, and a 60 percent chance they’ll cut three times in 2019. On the economic merits, the Fed would certainly be justified in doing so.

Yet the Federal Reserve may hold back. And if they do, it will most likely be because Trump decided to open his big mouth.

That the Fed should make its monetary policy decisions independent from the executive branch is a norm cherished by American elites across the ideological spectrum. But it was not always thus: Back during World War II, the Fed essentially took orders from the Treasury Department, and kept interest rates pegged very low to finance the government’s massive war spending. But by 1951, Fed officials feared the perpetually low interest rates had opened the door to inflation, which had just cracked 21 percent. In two meetings early that year, the Treasury Department finally backed down, allowing the Fed to adjust interest rates as it saw fit.

Executive branch pressure didn’t go away entirely, of course. The current conventional wisdom points to President Nixon in particular, for browbeating the …read more

Source:: The Week – Politics


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