President Trump and several of his underlings are wrong in both form and substance in verbally browbeating the Federal Reserve Board to reduce interest rates.
On form, the constant criticism by the administration has the perverse effect of making it more difficult for the Fed to move rates in any direction. Especially when the criticism comes from the president himself, it has the appearance of an implicit threat against the Fed’s independence. A Fed move in the president’s direction will then look like capitulation, while a Fed move in the opposite direction would be interpreted as a political rebuke to the president and a bid to reemphasize its own authority.
Either way, the presidential criticism makes it harder, not easier, for the Fed’s board to set rates based on data rather than on perceived political imperatives.
Granted, there are times when a little presidential jawboning toward the Federal Reserve Board might be acceptable just to keep the Fed down to Earth. Such jawboning should be rare, though, and carefully calibrated — again, so as not to too openly seem to threaten its independence.
On substance, the call to reduce rates right now is horribly ill-advised. As Trump himself keeps trumpeting, the debt-filled economy right now is firing on almost all cylinders, with the lowest unemployment in half a century combined with rising wages. If the economy is doing so well already, why should interest rates again be reduced to juice it up even more?
As it is, the current federal funds rate of 2.5% is remarkably below the average rate of the past 50 years. If rates are historically low and the economy is sizzling, the greater risk lies in re-inflating prices than in causing a recession.
Plus, if some event does suddenly cause an economic slowdown, the Fed would have little room to counter that development with interest rate reductions if rates already are lower than today’s 2.5%. It makes no sense to take away even the already-attenuated tool from the Fed’s slim toolbox.
Finally, the single biggest threat to long-term economic health lies in the record-high levels of both public and private debt both in the United States and worldwide. A reduction in interest rates would encourage even more private borrowing and discourage saving, when what is needed is less of the former and more of the latter.
For all these reasons, the Trump administration should cool its jets. The Federal Reserve Board has deftly managed the gradual return toward “normalcy” after the years of quantitative easing brought on by the financial crisis of a decade ago. Unemployment and inflation are both low, while wages are rising. Why monkey with success?
