Trump's Fed complaints would make Turkey's Erdogan proud

Trump's Fed complaints would make Turkey's Erdogan proud
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According to media reports, President TrumpDonald John TrumpOver 100 lawmakers consistently voted against chemical safeguards: study CNN's Anderson Cooper unloads on Trump Jr. for spreading 'idiotic' conspiracy theories about him Cohn: Jamie Dimon would be 'phenomenal' president MORE has amplified his criticism of the Federal Reserve and of Federal Reserve Chairman Jerome Powell.

At a fundraiser and later in an interview with Reuters, Trump expressed his disagreement with the Fed’s policy of raising interest rates. With his characteristic focus on himself, the president complained that “during this period of time I should be given some help by the Fed. The other countries have accommodated.”

These remarks could easily be dismissed as Trump expressing his usual desire that everyone and everything support him. No doubt that is an explanation.

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Another angle that immediately suggests itself is the classic desire of a profligate sovereign for cheap money. Governments, generally massive debtors, have a natural interest in borrowing at low interest rates. But cheap money usually leads to high inflation and economic instability.

 

History is littered with examples of profligate sovereigns accommodated by subservient central banks, ending in high inflation and economic crisis. The president signed off on a massive tax cut this year, raising the federal budget deficit after years of decline. With all the borrowing ahead, no wonder he wants lower interest rates.

The modern institutional solution to the government’s cheap money preferences is to delegate monetary policy to a central bank that is insulated from political pressure. The central bank’s job is to keep inflation low and stable, with the understanding that this will provide the best environment for a stable, growing economy.

In the U.S., this solution was embodied in the 1913 Federal Reserve Act. It has received strong support from both political parties for over a century, despite occasional criticism on particular aspects.

Trump’s comments betray either ignorance of this consensus, or perhaps an “apres moi le deluge” contempt. Either way, they are completely out of line with the practices of U.S. presidents since the 1970s and with the practices encoded in the European Union’s Maastricht Treaty defining the rules of the game for the euro.

More startlingly, Trump stated that he had expected Chairman Powell to be an “easy money” chairman. As with many of Trump’s comments, it is difficult to judge his sincerity.

If true, it would be a shocking misread of Powell, who has served on the Fed’s Board of Governors during the whole period of interest rate increases, voting for them all.

While it is mind-boggling to think that Trump did not understand Powell’s record and beliefs, one must also reserve the possibility that he understood them perfectly well but chooses to say something different now.

Ironically, Trump’s remarks place him right in line with one of his adversaries of the moment, Turkish President Erdogan.

Gradually unwinding the independence of the Turkish Central Bank, which gained substantial credibility for its work in stabilizing the country after its last major financial and economic crisis in 2001, President Erdogan has insisted on low interest rates even as the Turkish lira has tanked and inflation has risen sharply.

The only way that Erdogan truly outdoes Trump is that he has appointed his son-in-law as the minister of finance. Jared KushnerJared Corey KushnerThe Hill's Morning Report — Sponsored by United Against Nuclear Iran — Kavanaugh confirmation in sudden turmoil Manafort’s plea deal — the clear winners and losers Five takeaways from Manafort’s plea deal MORE for Treasury secretary anyone?

President Trump’s call for accommodation is simply out of touch with the current U.S. economic situation. Unemployment is at its lowest levels since the late 1990s, and inflation is at the Fed’s 2-percent goal. Clearly, the economy is in danger of overheating.

There are those who think that the labor market has more room to improve, pointing to still fairly modest wage increases. However, even these critics do not generally think that the Fed should lower the federal funds rate toward 0 percent.

Most likely, the Fed will continue to ignore the president’s sniping. One can hope that Congress will not make any moves to reduce the Fed’s independence by amending the Federal Reserve Act. Nonetheless, such attacks on the Fed are worrisome. They threaten the Fed’s credibility and the stability of our economy.

The dollar dropped immediately after the president’s remarks. His off-the-cuff claims that both China and the European Union are manipulating their currency, dropped in his Reuters interview in contradiction to findings from the Treasury Department, only added to the chaos.

Adverse market reactions to comments about monetary policy are common. They are the reason why high U.S. economic officials are traditionally extremely tight-lipped and cautious in talking about interest rates or the value of the dollar.

These attacks on the Fed are not good for our economy, and they are part of a broader set of small and large attacks on the institutions of our government and democracy. Even if they do not change Fed policy in the short-run, it would be unwise to take them lightly.

Evan Kraft specializes in the economics of transition, monetary policy and banking issues as a professor at American University. He served as director of the research department and adviser to the governor of the Croatian National Bank.