Trump calls on the Fed to restore quantitative easing, which makes no sense

Having already announced plans to nominate two political loyalists for seats on the Federal Reserve, Donald Trump said Friday that he believed the central bank should do everything possible to boost the economy by lowering rates. Interest and taking new unconventional measures. not.

Specifically, Trump told reporters that the Fed should resume its "quantitative easing," the program by which it bought billions of dollars of Treasury bonds and mortgage-backed securities after the Great Recession to guarantee the growth. The Fed recently relaxed its efforts as part of a process called "quantitative tightening," which the president has long complained about.

"Well, personally, I think the Fed should lower its rates," Trump said Friday. "I think they really slowed us down. There is no inflation. I would say that in terms of quantitative tightening, it should now act as a quantitative easing. Very little or no inflation. And I think they should lower their rates and get rid of quantitative tightening. You would see a rocket. Despite that, we are doing very well. "

Taken literally, Trump's recommendation does not make much sense. The Fed resorted to QE after the recession as it had already reduced its key rate to zero, which meant it could no longer rely on its usual tools to accelerate growth. The bond buying wave was aimed at injecting more money into the financial system, reducing interest rates and increasing borrowing and economic activity, while signaling to the markets that the Fed was planning to maintain low rates very long.

Today, however, interest rates are no longer at zero. Until their break in March, the Fed had been increasing them for about two years. If policymakers wanted to lighten the monetary reins, they could simply reduce rates again, as Trump would like. There is no reason to return simultaneously to the search for Treasury debt and mortgage debt. James Bullard, president of the US Federal Reserve in St. Louis and one of the Fed's most dovish leaders, hinted that he would not even do anything at this stage if they did.

Trump, to his credit, has something to say about inflation. The Fed has not reached its 2% annual target since the recession and its benchmark has so far risen only 1.8% from one year to the other. . When the Fed finally suspended its interest rate hikes in March, President Jerome Powell admitted that the central bank had exceeded its own targets and that the low inflation rate posed serious problems. Between this and some of the recent warning signs occurring in the bond market, one could perhaps argue in favor of a rate cut, even though the economy still seems to be reasonably strong and create jobs.

It should also be noted that the Fed is already planning to end its quantitative tightening effort around September, which means that it will maintain the size of its balance sheet, which until recently was roughly equivalent to what Trump wanted.

So, why stick to Trump's suggestion of going back to the good old days of QE? I have often noted that Trump's desire to obtain low interest rates and the anger against Powell to increase them were rather reasonable for political reasons, even though his habit of publicly beating Powell shook the tradition of the presidents of not openly politicizing central bank decisions. Trump's problem with the Fed was not that his ideas were wrong. It was that he was apparently too much unable to choose central bankers who shared his point of view. Rather than doing himself a minimum of homework, he simply relied on Treasury Secretary Steve Mnuchin's recommendations, then got angry when he did not get the results he expected. Even though it was easy to laugh at the situation, it suggested that Trump could do something foolhardy, such as trying to fire or dismiss Powell, potentially resulting in a legal crisis.

Now the situation seems to be reversed. By choosing Stephen Moore and Herman Cain for the Fed's Board of Governors, Trump finally applies to his own brand of crass political cronyism at the central bank. Neither Moore, a conservative economics expert best known for his magical ideas on tax cuts, nor Cain, a former pizza executive and failed presidential candidate, belong to the Fed according to any traditional criteria . But both are strong supporters of the president and we can probably count on them to take control of his Twitter feed. The funny thing is that while the president is finally discovering how to exert a little influence on monetary policy, his ideas on this seem to be flying. Maybe Trump gets the bad advice of the very sycophants he names on the Fed board. Maybe he's just getting strident on his own. Anyway, the joke is on us.