Donald Trump has been grumbling about his displeasure with the Federal Reserve for a while now. But after Wednesday’s stock market rout, in which nerves over rising interest rates helped push the Dow Jones down more than 800 points, the president finally let loose in the way only he can. “I think the Fed is making a mistake. They are so tight. I think the Fed has gone crazy,” he said before a rally on Wednesday. Later, Trump called into Fox Business for an interview, during which he brushed aside a suggestion that stock investors may have been reacting to his trade war with China, and again blamed the Fed.
“The problem I have is with the Fed. The Fed is going wild. I mean, I don’t know what their problem is that they are raising interest rates and it’s ridiculous,” Trump said. He added that the “Fed is going loco,” presumably for the benefit Spanish speakers.
Whether our monetary policy makers have really lost their marbles on interest rates, is, of course, a matter of debate. What’s not is that Fed Chair Jerome Powell—who, remember, Trump did pick for the job—has been sounding a bit aggressive lately, and that has likely been causing some of the market turmoil. Last month, the Fed hiked rates to their highest level since April 2008, while projecting another increase before the end of the year and three more in 2019. Then earlier this month, Powell made some of his most hawkish comments yet as chair, albeit cloaked in banker speak. “Interest rates are still accommodative, but we’re gradually moving to a place where they will be neutral,” he said. “We may go past neutral, but we’re a long way from neutral at this point, probably.”
Let’s unpack all of that. When interest rates are accommodative, it means the Fed is giving the economy room to run, at the risk of some extra inflation. When rates are “neutral,” they’re supposed to be at a Goldilocks point that neither increases unemployment or pushes inflation above the Fed’s 2 percent target. When Powell says “we’re a long way from neutral,” that means he definitely sees a whole bunch of interest rate hikes in the future. When he says “we may go past neutral,” he’s saying that the Fed could eventually start pumping the brakes hard on the economy.
This is all contributing to agita in the financial markets. (Stocks started plunging again Thursday morning in another volatile day of trading). The interest rate on the benchmark 10-year Treasury bond was already marching higher before Powell’s comments, thanks in part to strong economic growth numbers and the fact that the U.S. is going to need to issue a boatload of debt to finance its deficits. (It’s been above the 3 percent mark since September, which seems to have some mysterious psychological importance to investors). Powell’s remarks were a sign that they’re going to keep rising for a while. And as rates go up, they tend to create volatility, especially in the equity markets. Some of the reasons are straightforward: When you can earn higher interest on a safe asset like Treasuries, they become more appealing, so people will dump riskier assets like stocks and buy boring vanilla bonds. But investors have also made more complicated bets that might have seemed profitable in a low-interest rate world, and are looking worse and worse every time Powell and the Fed board decide to ratchet rates a little higher. As those wagers unwind, it causes upheaval as well. Then, of course, there are questions about what higher rates will do to the economy: Will the housing market grind to a halt? Will corporate profits fall as borrowing gets more expensive? There lots of reasons for anxiety.
Which means there are also lots of reasons for Trump to be peeved. Right now, the economy is fairly strong, even in spite of Trump’s counterproductive tariff policies (that, after all, is why the Fed is raising rates in the first place). If Powell weren’t hiking, the economy might be growing even faster and the markets would likely be calmer, which would be preferable for any sitting president. Meanwhile, somewhere in the back of his mind, I have to imagine that Trump or his advisers are a little worried that the Fed might accidentally go overboard, and nudge the economy into a recession within the next few years. Trump wants to distance himself from the market instability today, and probably any possibility of disaster tomorrow, and so he’s taken to loudly criticizing Powell’s actions. This is, of course, absurd—he picked the man after all, and Powell’s outlook on monetary policy was well known at the time. But our president has never been one to embrace responsibility. It’s always someone else who’s loco.