White House & President

Why the Fed can't please the president

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President Trump this week intensified a campaign to "bend the Federal Reserve to his will," said Binyamin Appelbaum at The New York Times, announcing plans to appoint a fierce partisan to the central bank's board. Unlike the Fed's current governors, Stephen Moore is not a professional economist, but a frequent pundit and onetime editorial writer. Moore co-authored a book called Trumponomics and shares the president's view that "high interest rates are still smothering the economy." He has called the Fed's chairman, Jerome Powell, "totally incompetent," and criticized the Fed in a series of Wall Street Journal op-eds, which may have helped him get Trump's nod. Though the Federal Reserve said there would be no more planned interest-rate increases in 2019, Moore would go even further, bringing interest rates down from already-low levels to ignite the economy. That could give Trump the short-term economic boost he craves, potentially at the expense of a painful crash in the future.

Last week, the Fed said that U.S. economic growth was slowing, "and painted a far less rosy economic picture than the White House," said Jim Tankersley, also at the Times. It cut its growth forecast to 2.1 percent, lower than its previous estimates — "and more than a percentage point less than the 3.2 percent growth the White House predicts." That doesn't mean the economy is failing; Powell tempered the predictions with a statement that the economy is still "in a good place." But he signaled that the Fed was not worried about overheating, and left open the possibility of rate cuts. The Fed is now "more or less in the right position," said the Financial Times in an editorial. Last year, the Fed was cramming through what seemed like predetermined rate hikes, even if they were not really justified. The messaging was mixed, which caused markets to fluctuate. Now the Fed "should be able to move rates in either direction without major disruptions."

The nation's central bank has "a dual mandate: maximum employment and stable prices," said Catherine Rampell at The Washington Post. It is hard to do both. Politicians "pretty much always have an incentive to lower interest rates and print money, especially heading into an election." But if you keep doing that, you get inflation. And if a central bank appears to be politically compromised, it doesn't even have to do much to juice the economy — the mere expectation that it will makes businesses start "jacking up prices." Down that path are Venezuela and Argentina. That's why the Fed's "reputation for political independence" matters. Nominating Moore for a spot on the Fed could backfire, said Felix Salmon at Axios. Last week the Fed already gave Trump what he wanted when it stopped raising interest rates. The markets don't think it was the result of political influence; if they did, "the Fed's ­credibility — by far its most important ­asset — would be shattered." Now Trump chooses a man who "has consistently called for higher interest rates whenever a Democrat is in the White House and lower rates when it's a Republican." If Moore gets confirmed, it'll get harder for the Fed to lower rates and boost growth without evoking suspicion that it's swayed by politics.


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