Donald Trump’s bare-knuckled attack on Federal Reserve Chairman Jerome Powell in recent weeks has overshadowed a more pressing question for the U.S. economy: Does the president have a point?
Mr. Trump’s main beef with the central bank is that its ongoing policy of hiking interest rates is curbing growth just as Americans are reaping the benefits a buoyant economy. The job market is humming, with unemployment at its lowest rate in nearly half a century. Wages, which barely rose during the post-recession “recovery,” are finally giving workers a meaningful pay bump. Inflation remains tame. So why mess with success?
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The case against hiking interest rates
Mr. Trump’s unusually fierce rebuke of Powell — his own pick to lead the central bank — is, to put it mildly, a departure from precedent. Presidents don’t usually rough up Fed chiefs in public, largely out of respect for the central bank’s ostensible independence from politics and to avoid undermining its credibility.
Yet accusations that the Fed is snuffing out the economic flame are nothing new, or even a charge confined to Republicans. Liberal economists have long complained that monetary policymakers often put their mandate to keep inflation in check — a priority for, among others, wealthy investors and corporations — over the Fed’s other duty to promote maximum employment.
“If I were on the [Federal Open Market Committee], I would not raise rates at their upcoming meeting in December,” said Josh Bivens, research director of the left-leaning Economic Policy Institute, referring to the Fed panel that sets interest rates.
The reason: Some economic signals suggest rising rates really are crimping growth, such as the contraction in housing construction this year.
After all, let’s be clear on what the Fed is trying to do in raising interest rates: putting a leash on economic growth by pushing up unemployment. Put another way, keeping a lid on inflation means tamping down hiring and wages.
Another argument for holding interest rates steady is that Americans have only recently started to claw their way out of the deep, dark hole that followed the housing crash.
“There’s a definite case to be made to experiment with running the economy as hot as we can as long as we can,” Bivens said.
Why the Fed could push pause
In the end, Powell may end up giving Mr. Trump what he wants, though not because of the president’s jawboning. In a speech Wednesday in New York, the Fed chief opened the door to slowing the pace of monetary tightening. He said interest rates are “just below” their so-called neutral range, the level at which they’re neither speeding up nor slowing down the economy.
Translation: If growth does slip in 2019, as many expect, the Fed could well take a chill pill and hold off on further rate hikes.
Investors cheered the dovish turn, sending the Dow up more than 600 points — just the kind of market pop that Mr. Trump likes to point to as evidence his policies are working.
Powell “is raising the possibility of moving the landing zone by saying that we’re not too far from the neutral rate and don’t need to raise rates as much as previously thought,” said Gregory Daco of Oxford Economics.
By contrast, Daco thinks Mr. Trump’s claims that the Fed is denting the economy don’t hold up to scrutiny, noting the strong pace of growth in recent months even as policymakers were in hiking mode. The far bigger impediment to growth next year will be the fading of any stimulus from the massive tax cuts Mr. Trump enacted in late 2017, he predicted.
“Fed tightening won’t be the main source of the slowdown in 2019,” said Daco, “it’ll be coming from Trump’s policies.”
Of course, that could be another reason for Mr. Trump to put Powell in his crosshairs. If the economy does run off the rails next year, politicians will be looking for someone to blame.
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