Federal Reserve Does Exactly What Trump’s Long Wanted
But not for the same reason.
In fact, quite the opposite. Trump’s been hounding the Fed to stop raising interest rates because he says making money more expensive (which is what raising interest rates does), is interfering with his economic miracle.
The Fed initially responded by suggesting growth triggered by Trump and Republican’s $1.5-trillion tax cut, mostly to corporations, rekindled the possibility of inflation. And the Fed’s #1 responsibility really, is ensuring the U.S. economy never goes into an inflationary spiral, even if that means having a slightly more (or less as the case may be) aggressive monetary policy than might be called for by present situations at any given time.
Another reason for the Fed to naturally lean toward raising rates when the economy is booming, is it gives them room to lower them if the economy starts slowing. If interest rates are already at or close to zero at the beginning of a Recession, the Fed possibly not being able to turn to its first line of defense because it doesn’t have any room to stimulate the economy by lowering rates, could create a long-term economic disaster. And even though the Fed nudged rates up last year, they’re still close to historically low levels, so that’s even a risk right now.
Of course that stance triggered a series of nasty Tweets from Trump, aimed at Fed Chair Jerome Powell, who Trump nominated, but is supposed to operate somewhere outside the President’s direct sphere of influence.
Trump argued that the Fed should be encouraging adding even more money to the economy. Which, in combination with his tax cuts would turbo-charge the great economic environment he alone has created and takes all the credit for. And denying him that in favor of caution was almost a personal affront.
But recently the Fed announced it would back off its aggressive policy and be more flexible and cautious about doing interest rate hikes.
And now the Fed says it doesn’t see the need to do any at interest rate hikes at all this year, and maybe just one next year.
But, and this is a big but the Fed says it’s doing (or not doing) all of this not because Trump was right all along (of course now he’s going to brag he was), but because the economy isn’t really as hot as it thought it might be, and now it’s seeing weakness, particularly in the global economy, but also in the U.S., as the impact of those massive tax cuts wear off. With that said, Fed Chair Powell says he expects the economy to continue to grow at a rate of about 2% annually, and unemployment to stay low. Still, in a potentially slower economic environment, giving banks, corporations and people easier access to money won’t hurt, and may even be necessary. And the threat of inflation isn’t even on the horizon right now. (In fact, the absence of higher prices could underscore some of the Fed’s concerns.)
Here’s Powell explaining the Fed’s position (click on the photo to watch):
That’s why, if you look at the Fed’s projections for U.S. economic growth, the numbers are way lower than the White House’s expectations: around 2% as opposed to more than 3% from the White House. Of course the Fed always has reason to be cautious. And the White House is trying to sell a budget with huge increases in deficit spending, mostly for military, so a more optimistic outlook is pretty essential if their objective is to make some really bad budget deficit numbers look not quite so bad.
Compounding the U.S. outlook are Trump’s various tariff wars, and his contention that tariffs do not need to be removed even if an agreement is reached. He made that threat against China this week, as a way of ensuring that if there is a deal, China will comply with it. His chief trade negotiator heads back to China next week.