Before he became president, Donald Trump was a staunch critic of the Federal Reserve’s three-round quantitative easing (QE) program. This multi-trillion-dollar endeavor consisted of buying government bonds, mortgage-backed securities (MBS), and other financial assets to inject money into credit markets that would artificially suppress interest rates. The mechanism of cheap money was meant to spur borrowing, boost the stock market, and monetize the debt. Simply put, QE was an unconventional policy tool to stimulate the economy – in the short-term. In the long run, it created a series of moral hazards.
The real estate billionaire mogul railed against the Fed, accusing the central bank, specifically heads Ben Bernanke and Janet Yellen, of keeping rates at historic lows to help President Barack Obama. At the same time, he further asserted that this helped people like him while sacrificing retirees, savers, and everyone not residing at the Eccles Building’s spigot.
His criticisms, which were not heard on national television since former Rep. Ron Paul (R-TX) made the Fed a part of mainstream political discussions, hit the bullseye. Accommodative monetary policy, he argued, is a political tactic designed to mask weaknesses in the economy, paint a false impression of how strong it is, and help presidents get re-elected.
Now that Trump is occupying the White House, he wants what his predecessors had: low rates and keys to the printing press. But doesn’t this contradict his past statements and undermine the economy?
Trumpire Strikes Fed
Since Trump entered the Oval Office, the Eccles Building has pulled the trigger on several rate hikes and shed tens of billions of dollars from its $4 trillion balance sheet. This has been a part of the Fed’s overall efforts to gradually normalize monetary policy, much to the chagrin of the incumbent administration.
For months, the president has defied tradition, choosing to lambast the Fed and his nominee, Jerome Powell, in every way possible. His main beef is that the economy would be a lot stronger if it were not for rate hikes. While the White House cannot terminate the Fed Chair, he could step down, which is an unlikely development, based on a recent 60 Minutes interview.
Trump realized this, conceding in a brief March telephone call: “I guess I’m stuck with you.”
So, what does Trump want? QE4: lower rates and an increase in the balance sheet. In fact, chief White House economic adviser Larry Kudlow has encouraged the central bank to cut rates by half-a-percentage point. The latest Fed nominee, Stephen Moore, has also rebuked the rising-rate environment, echoing the calls of a rate cut.
It is unclear if Trump will get what he wants. So far, the Fed has hit the pause button on rate hikes and suspended the curtailment of the balance sheet. The next step would be the full-blown rate cut, but Minneapolis Federal Reserve Bank President Neel Kashkari says the Federal Open Market Committee (FOMC) will only pay attention to economic data, not cave to political pressures.
Has Kashkari not studied Fed history of the last eight decades? If he did, he would understand that the Fed and the White House have had a cozy relationship, from former President Richard Nixon and Arthur Burns to former President Bill Clinton and Alan Greenspan – it will always be that way until the Fed is abolished or a gold standard is brought back.
Trumponomics: True or False?
Is the U.S. economy as strong as it is touted? It’s not too shabby: a 50-year low unemployment rate, an average of 200,000 jobs created monthly, and rising hourly wages. There are holes in the economic ship, though, and perhaps this is what President Trump wants to plug.
That said, if “this is the greatest economy that we’ve had in our history,” then why can it not handle 2% or 3% interest rates? Moreover, why can’t the Trump economy be able to withstand allowing $50 billion in securities to mature each month without reinvesting the proceeds?
Perhaps this is part of his strategy of playing 4D chess, gin rummy, and mahjong underwater, blindfolded, and handcuffed. With all this talk of a cooling economy and a contraction on the horizon, President Trump might be nudging the Fed to impose preventative measures ahead of his re-election bid. Should the central bank act pre-emptively, then it could postpone a recession until after the 2020 race, otherwise his chances of garnering a second term dissipate.
Remember, it’s the economy, stupid!
And voters will, indeed, remember come Election Day – good and bad.
The Fall Guy
For the last two-plus years, President Trump has taken credit for all the good that has transpired in the U.S. economy. But if he is the cause of all this winning, then shouldn’t Trump also be the culprit for all the bad, too? The answer to that question might lie in his Twitter history.
When the U.S. stock market was roaring and posting record highs on a daily basis, he regularly tweeted this out. However, when the Dow Jones was cratering, posting triple-digit losses, he was eerily quiet. Of course, in conventional politics, you are supposed to amplify your successes and conceal your failures.
Should the economy spiral out of control before the 2020 election, Trump will inevitably be the fall guy. This is bad news because the left will use this as evidence that tax cuts, deregulation, and other conservative policies do not work. Trump would have been better off educating the public about the dangers of Fed policy and how manipulation can produce phony results.