July 23, 2018
Greetings to all from Utah!
Much of the business press has been in an uproar because Donald Trump has criticized the Fed’s policy of raising interest rates. Trump complains that interest rate hikes will slow the economy and increase the trade deficit by raising the value of the dollar.
The business press is outraged not necessarily because they disagree with what Trump says (although many surely do) but they argue it violates some fundamental principle of government for the president to talk about the Fed. The outraged reporter gang might want to study up some on the meaning of democracy.
First of all, one will be hard-pressed to find any written law or constitutional principle that suggests that it is inappropriate for the president or any politician to talk about Fed policy. Robert Rubin, President Clinton’s Treasury Secretary was and is fond of saying that presidents and other political figures should not talk about the Fed.
In this respect, it is worth noting that Robert Rubin was co-chair of Goldman Sachs before joining the Clinton administration and then went Citigroup after leaving his post as Treasury Secretary. Rubin pocketed more than $120 million for his years at Citigroup. Citigroup was at the center of the housing bubble and would have gone bankrupt without massive government aid in 2008–2010.
This is worth mentioning in the context of politicians talking about the Fed because as it stands now, the Fed tends to be overly responsive to the concerns of the financial industry. Its structure gives the industry a direct voice in the Fed’s conduct of policy. It is understandable that flacks for the industry would not like to see its cozy relationship with the Fed threatened by input from the larger society, but it is difficult to see why anyone who believes in democracy would share this view.
There is an issue as to whether we want to see the president or members of Congress directly setting interest rates. My answer would be no in the same way that we would not want the president or members of Congress to decide which drugs get approved for public use. It is appropriate that this authority rests with experts at the Food and Drug Administration (FDA).
Nonetheless, it is the responsibility of the Congress and the president to monitor the FDA. If it went five years without approving any new drugs or began approving drugs that led to a surge in illnesses and death, it would absolutely be the responsibility of Congress and president to determine how the FDA was exercising its responsibilities.
In the same vein, the Fed is charged with maintaining full employment and price stability. If it fails badly in meeting these targets, then it certainly is reasonable for political figures to be raising questions about the conduct of its policy. The Fed’s structure guarantees it a high degree of independence from immediate political pressures, so no one at the Fed has to worry about losing their job because Donald Trump or a powerful member of Congress is unhappy with their actions.
In terms of the specifics of the complaints, Trump does seem confused. While I would agree that the rate hikes do needlessly slow the economy and put upward pressure on the value of the dollar relative to other currencies, the latter was actually an implicit goal of his tax cut.
The argument for a corporate tax cut was that it would increase incentives to invest in the United States rather than overseas. This means that both US corporations would invest more money domestically and foreigners would also look to invest in the United States.
Reducing the outflow of investment dollars and increasing the inflow from abroad would be expected to raise the value of the dollar. Less supply of dollars and more demand for dollars means a higher price of dollars measured in foreign currency. This would mean a larger trade deficit, but that it is just a logical implication of an increased inflow of foreign capital.
I know Kevin Hassett, President Trump’s chief economic adviser. He would be quite capable of explaining this point to the president if he would take a few minutes to pay attention. (Of course, we are not actually seeing any uptick in investment, the bulk of the tax cut seems to be going into shareholders’ pockets, so Trump may not have to worry about this story after all.)
So long and short, folks in the media should get over their hysteria about Trump criticizing the Fed. (Really folks, at this point in the Trump administration, criticizing the Fed is what gets you up in arms?) He does have a partially valid point about rate hikes slowing the economy, but he seems confused about the factors that affect the value of the dollar.
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