Criticizing Federal Reserve is winning game plan for Trump

Criticizing Federal Reserve is winning game plan for Trump
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President TrumpDonald John TrumpTrump conversation with foreign leader part of complaint that led to standoff between intel chief, Congress: report Pelosi: Lewandowski should have been held in contempt 'right then and there' Trump to withdraw FEMA chief nominee: report MORE took direct aim at the Federal Reserve in comments last Friday at a fundraiser in the Hamptons and yesterday in an interview with Reuters. “I am not thrilled with his raising of interest rates,” Trump said as he was referring to central bank chairman Jerome Powell. In an interview last month, Trump broke a longstanding tradition of American presidents and chose to publicly criticize the Fed for raising rates. Trump lamented that “every time you go up, they want to raise rates again” and that it was unfair for us to be “penalized because we are doing so well.”

This would seem to be a consistent refrain from the president. On the campaign trail, candidate Trump disparaged the Fed on numerous occasions, stating that central bank policy fuels “false money” because “money is essentially free.” However, that was under the Fed led by Janet YellenJanet Louise YellenWhat economic recession? Think of this economy as an elderly friend: Old age means coming death On The Money: Rising recession fears pose risk for Trump | Stocks suffer worst losses of 2019 | Trump blames 'clueless' Fed for economic worries MORE, who was appointed by President Obama. The criticism by Trump was aimed at keeping interest rates low. Trump claimed that “Yellen should be ashamed of herself” for keeping interest rates so low because she is “obviously political and doing what Obama wants her to do.” Essentially, Trump believes that Yellen was wrong for accommodating Obama and Powell is wrong for not accommodating him.

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Trump is correct in asserting that rising interest rates are generally bad for financial markets. Research in one of my books found that from 1966 through 2016, when interest rates were rising, the S&P 500 returned an anemic 5.8 percent annually compared to 15.2 percent annually when rates were falling. Rising rates are bad for stock markets and, by association, bad for the popularity of presidents.

It is not hyperbole to suggest that economic performance makes or breaks incumbent presidents. Precisely because the Fed can exert such a powerful influence on the economy and financial markets, it operates independently of the executive branch of government. The institution needs to be independent or the central bank could be politicized to either benefit or discredit the interests of the party in power.

Back in 2015, Trump said he did not believe that the Fed is independent. “It is not close to being independent,” he stated on the campaign. Asked in a Reuters interview this week if he believed that the Fed is independent, the president responded, “I believe in the Fed doing what is good for the country.” This is a data driven Fed and it is likely that it will ignore Trump. However, if the Fed is on the fence regarding a future rate hike, it could consider his comments and err on the side of raising rates, lest the central bank be viewed as succumbing to White House criticism.

Pundits debate whether tweets and controversial statements by Trump are a carefully crafted strategy or simply impulsive reactions to the issues of the day. With respect to his criticism of the Fed, I believe he has devised a winning strategy. If the Fed raises rates and the economy slows, or moves into a recession, Trump has created a convenient scapegoat. If the economy flourishes as rates rise, he will ascribe credit to the prudent fiscal actions undertaken by his administration.

Robert R. Johnson is a professor at the Heider College of Business at Creighton University, a principal at Fed Policy Investment Research Group, and an author of “Strategic Value Investing” and “Invest with the Fed.”