Never Ask an Inflation Hawk to Do a Dove’s Job
Trump whines that his hand-picked Fed chief is raising rates too fast. He never should have dumped Janet Yellen.
Bloomberg, October 26, 2018
If you want a dovish monetary policy, don’t appoint a hawk as Federal Reserve chairman.
That is the most recent lesson that political neophyte and U.S President Donald Trump seems to be learning.
Or at least that’s the conclusion any reasonable person in these unreasonable times might draw based on what the president says.
Of course, Trump says a lot of things, many of which seem spontaneous, provocative, at odds with the facts or outrageous — often some combination of the above. Others seem more thoughtful, tactical and calculated. They all come in an endless fire hose of tweets, asides, interviews and rally speeches.
Investors have figured out that most of these are of little consequence and are designed for political purposes, often to energize Trump’s base of supporters. That’s fine — all presidents do it to some extent or another. Yes, there can be real and serious geopolitical repercussions or impact on the markets from presidential pronouncements, but most of Trump’s are not precise policy statements.
But there are exceptions. That may well be the case in the drumbeat of criticism Trump has directed at the person he personally put in charge of the Fed, Jerome Powell. Let’s consider a few points:
• Candidate Trump hates low interest rates.
• President Trump loves them.
• Candidate Trump said then Fed Chair Janet Yellen should be “ashamed” about low interest rates.
• President Trump ditches Yellen, an inflation and interest-rate dove and replaces her with Powell, an inflation and interest-rate hawk.
In other words, Trump as president got rid of the Fed chief he should have embraced and named a replacement at odds with his newfound leniency on rates.
Trump now regrets appointing Powell, who is doing what hawkish Fed chiefs do, which is raise rates during solid economic expansions. The Fed, in the words of our president, has gone “loco.”
But just where is the loco? When he fired Yellen the dove, Trump sent an unmistakably clear message to the Federal Reserve Open Market Committee: Low rates are bad. When he appointed Powell, the message was reinforced: The days of easy money and crisis-management monetary policy are over.
Some people have argued Trump may not have understood what message he was sending, but the rest of the economic firmament read it loud and clear.
Perhaps a better phrase might be “sensitive.” Past presidents usually have been more attuned to capital markets, using measured and accommodating language specifically designed not to roil either equity or fixed-income traders. 1
Markets have taken note and investors now seem to be fully incorporating into their outlooks what the end of cheap capital will have on corporate profits and the macroeconomy.
But it seems as if it’s more than that: It’s almost as if the president’s economic agenda was geared toward forcing the Fed to tighten monetary policy. By most accounts, the president’s tariffs pose an inflationary risk, with the added potential for his trade war with China to damp or even end this economic recovery.
Then there were Trump’s pro-cyclical tax cuts. Classic economic theory tells us that during the latter stages of an economic cycle, the government should be reducing spending and increasing taxes to manage the deficit. John Maynard Keynes demonstrated that countercyclical policy works to offset economic weakness and declining demand; big tax cuts and deficit spending are best done when the economy is slowing and the private sector is retrenching.
Instead, eight years after an economic recovery began, with the stock market at record highs and unemployment at near-record lows, Trump and the Republican Congress passed a $1 trillion tax cut. A year later, the Congressional Budget Office announces that the budget deficit rose 17 percent in fiscal 2018 and is headed for $1 trillion in the current fiscal year.
Was anyone not expecting the results to be potentially inflationary?
I am not in the same camp as my Bloomberg Opinion colleague Stephen Gandel, who wrote that Trump is bad for the stock market. But the president seems baffled by his own decisions and appointments, 2 as well as by some basic economic facts. Forget expert judgment — basic levels of competence are important to governing. Impulsive decisions driven by fundamental misunderstanding about monetary policy and basic economics will have consequences.
Until the president learns some critical lessons about monetary and economic policy, I suspect the White House will make personnel appointments and decisions with the potential to undermine the president’s own agenda. One can only hope the rest of us are spared the worst of the fallout.
1. James Carville, President Bill Clinton’s political adviser, famously said: “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”
2. On top of complaining about the Fed chairman he appointed, he has whined about the FBI chief he appointed, the attorney general he appointed, the chief of staff he appointed, the CIA chief he appointed, the communications directors he appointed, the chief strategist he appointed. There’s a pattern here.
I originally published this at Bloomberg, October 26, 2018. All of my Bloomberg columns can be found here and here.