Donald Trump is still angry at the Federal Reserve. He has been peeved at it for a while, of course. But his criticism seems to be getting harsher. The president told the Wall Street Journal that he sees the central bank’s recent interest rate hikes, which are meant to head off a spike in inflation but are probably contributing to turmoil in the stock market and a slowdown in home sales, as “a much bigger problem” for the economy than the usual object of his obsession, China. Then, he uncorked this nearly incomprehensible rant in a conversation with the Washington Post.
And I’m not blaming anybody, but I’m just telling you I think that the Fed is way off base with what they’re doing, number one. Number two, a positive note, we’re doing very well on trade, we’re doing very well—our companies are very strong. Don’t forget, we’re still up from when I came in, 38 percent or something. You know, it’s a tremendous—it’s not like we’re up—and we’re much stronger. And we’re much more liquid. And the banks are now much more liquid during my tenure. And I’m not doing—I’m not playing by the same rules as Obama. Obama had zero interest to worry about; we’re paying interest, a lot of interest. He wasn’t paying down—we’re talking about $50 billion lots of different times, paying down and knocking out liquidity. Well, Obama didn’t do that. And just so you understand, I’m playing a normalization economy, whereas he’s playing a free economy. It’s easy to make money when you’re paying no interest. It’s easy to make money when you’re not doing any pay-downs, so you can’t—and despite that, the numbers we have are phenomenal numbers.
This word slurry left many a bit baffled yesterday. As Jared Bernstein, the former chief economist to Joe Biden during his vice presidential days, put it on Twitter, “I just read that and it broke my brain. This stuff is like looking at an eclipse. You can’t read it directly. You have to have someone between you and the text to be safe.”
So let’s try to cut through the fog a bit. Part of this is a standard Trump talking point. The president believes he deserves more credit for overseeing a good economy than Barack Obama, because when Obama was president, the Fed mostly kept interest rates near zero, whereas now the central bank is raising them. This is, of course, nonsense. Obama inherited the fallout of the Great Recession, whereas Trump picked up an already-expanding economy. Meanwhile, the Fed’s decision to start normalizing interest rates in 2015 may have actually contributed to a little-noticed minirecession in the manufacturing sector that, for all we know, may have helped make Donald Trump president.
But the part that left people really confused was Trump’s seemingly mysterious comment about spending “$50 billion lots of different times, paying down and knocking out liquidity.” What are we paying down? Whose liquidity?
Thankfully, Bloomberg points us to an answer. As part of its efforts to return monetary policy back to normal, the Fed has been reducing its balance sheet by up to $50 billion per month. During the recession, the central bank bought up massive quantities of bonds in order to drive down borrowing costs, and now it’s slowly letting that portfolio shrink, which is nudging rates back up (or “knocking out liquidity” in Trump speak).
This is good news for the country: The president’s mind may be utterly addled by Fox News, but at least when it comes to macroeconomics, he still has some grounding in reality.
It is probably bad news, however, for Treasury Secretary Steve Mnuchin, who Trump is reportedly furious with for suggesting he nominate Jerome Powell as Fed chair in the first place. According to Bloomberg, Mnuchin has lately been asking bond traders if they’d prefer to see the Fed tighten policy by shrinking its balance sheet or hiking rates. He’s seemingly groping around for a way the Fed can keep going about its business that won’t set off his boss. (How he’d convince Powell to actually adopt that course of action is beyond me, since the Fed doesn’t like taking instructions from outsiders). But given Trump’s comments about the “$50 billion,” it seems like Mnuchin will have to keep searching for other ways to save his skin.