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Donald J. Trump is a real estate agent. He therefore naturally prefers low interest rates. But he is also president and publicly tells the Federal Reserve to keep rates low as he has done it will lead the opposite of what he wants. This is Fed Politics 101.
"Every time we do something great, it raises interest rates," Trump said Tuesday in an interview with our Journal colleagues, referring to Fed Chairman Jay Powell. "He was supposed to be a low-interest guy. It turned out no. "
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Now, who would say such a thing about Mr. Powell? Steven Mnuchin, Trump's Treasury Secretary, who oversaw the selection of the Fed President in 2017. As we reported at the time, Mr Mnuchin asked Mr Trump to choose Mr. Powell largely because he could be more easily influenced. than the other candidates. Mr. Trump could have taken another advice.
The truth is that no Fed President can afford that markets perceive the dictation of the White House's interest rates, and when they do, it usually ends in tears. See Arthur Burns under Richard Nixon and G. William Miller under Jimmy Carter. Alan Greenspan and Ben Bernanke were also too politically comfortable with the ruling administrations, but this influence was mainly behind the scenes.
Poor Mr. Powell has the daunting task of managing the transition from the greatest experience in the history of monetary policies. Mr. Bernanke and later Janet Yellen took advantage of the near-zero near-term rate cut and the unprecedented purchase of bonds to keep artificially low long-term rates. Politics pushed investors towards riskier assets such as equities although it did not contribute much to a real economy that grew slowly under the Obama administration.
Growth and animal spirits have resumed with Mr. Trump's combination of tax reform and deregulation policies. Now, Mr. Powell has to manage the more perilous monetary path that brings him back to normal, and Mr. Trump's public procrastination will not make the president's job easier. The Fed announced that it would further increase its short-term rates in December, for the fourth time this year. Mr. Powell will not want to be under the pressure of political pressure, even if economic events suggest it.
A better criticism of the Fed would be that it should have debauched its huge bond portfolio first and faster than it did. This would have weakened the Fed's control of the long-term bond market, encouraging a faster adjustment of risky assets before the Fed also begins to raise rates.
Now, the Fed is doing both at the same time, with more risk for asset prices and greater political risk for the Fed. See the rout of Wednesday in the stock prices that are now approaching the official correctional territory, which had recorded a decline of 10% in recent weeks.
Reducing the Fed's bond portfolio first and sooner is the policy recommended by former Fed governor Kevin Warsh before Trump sees him as a finalist for the Fed's presidency alongside M Powell. But Mr Mnuchin preferred Mr Powell and the president associated with 'a low interest rate guy'.
The Fed's policy aside, the fundamental question is whether Mr. Trump is right in saying that the central bank is too tight. We did not think so, because short-term rates are always equal to or lower than the rate of inflation. Rates are expected to recover from their historic lows in a growing economy of nearly 4%.
There are, however, signs of slowing growth, particularly in the housing sector. New home sales fell 5.5% in September, down 13.2% from a year ago. This is partly related to hurricanes, but the affordability of housing is also a problem due to rising mortgage rates. Business and consumer confidence remains high, but it deserves to be monitored if stock and other asset prices continue to fall.
The biggest economic risk is slower growth abroad, which Mr. Trump should be interested in although he does not claim it. The faster growth in the United States and rising interest rates are attracting capital from other markets. Trump's tariffs are also damaging trade flows and forcing companies to delay certain investments. Taxes at the border are never a free meal, whatever White House advisor Peter Navarro tells Trump.
The White House's director of economic affairs, Larry Kudlow, said Trump was merely giving his opinion on the Fed and not giving Mr. Powell an order. There is no doubt that the president is also deterring the White House from any economic downturn. Mr. Trump needs a leaf more than even most politicians. This is a good reason for the Fed to ignore the president and focus on adopting its policy – whether or not it implies a rate hike in December.
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