Having already announced his intention to nominate a pair of political loyalists for seats at the Federal Reserve, Donald Trump said on Friday that he believed that the central bank should make an all-out effort to boost the economy by cutting interest rates and taking additional unconventional steps.
Specifically, Trump told reporters that the Fed should resume “quantitative easing,” or QE, the program through which it bought trillions of dollars’ worth of Treasury bonds and mortgage-backed securities after the Great Recession in order to goose growth. The Fed has recently been unwinding that effort in a process known as “quantitative tightening,” which the president has complained about at length.
“Well I personally think the Fed should drop rates,” Trump said Friday. “I think they really slowed us down. There’s no inflation. I would say in terms of quantitative tightening it should actually now be quantitative easing. Very little if any inflation. And I think they should drop rates, and they should get rid of quantitative tightening. You would see a rocket ship. Despite that we’re doing very well.”
Taken literally, Trump’s recommendation does not make a lot of sense. The Fed resorted to QE after the recession because it had already cut its benchmark interest rate to zero—meaning that it could no longer rely on its usual tools for speeding up growth. The bond-buying spree was designed to inject more money into the financial system, lowering interest rates and spurring more borrowing and economic activity, while also signaling to markets that the Fed planned to keep rates low for a very long time.
Today, however, interest rates are no longer at zero. Up until they paused in March, the Fed had been hiking them for approximately two years. If policy makers wanted to ease up on the monetary reins, they could simply cut rates again, just like Trump wants. There is no reason to simultaneously go back to snapping up Treasury and mortgage debt. James Bullard, president of the Federal Reserve Bank of St. Louis, and one of the most dovish leaders at the Fed, has suggested that it wouldn’t even do anything at this juncture if they did.
Trump, to his credit, does have a point about inflation. The Fed has failed to hit its own annual target of 2 percent since the recession, and at the moment, its preferred index is up only 1.8 percent year-over-year. When the Fed finally paused its interest rate hikes in March, Chair Jerome Powell admitted that the central bank had been undershooting its own goals and that low inflation posed a serious challenge. Between that, and some of the recent warning signs that have come out of the bond market lately, there may be an argument for cutting rates a bit, even if the economy still seems to be reasonably strong and adding jobs.
It’s also worth pointing out that the Fed already plans to end its quantitative tightening effort around September, meaning it will maintain the size of its balance sheet, which until recently is pretty much what Trump wanted.
So why harp on Trump’s suggestion that we return to the good old days of QE? I’ve often noted that Trump’s desire for low interest rates and anger at Powell for hiking them were pretty reasonable on pure policy grounds, even if his habit of publicly thrashing Powell undermined the tradition of presidents not overtly politicizing the central bank’s decisions. Trump’s problem, when it came to the Fed, wasn’t that his ideas were wrong. It was that he was seemingly too inept to pick central bankers who actually agreed with his views. Rather than doing a bare minimum amount of homework himself, he simply relied on the recommendations of Treasury Secretary Steve Mnuchin, then fumed when he didn’t get the results he desired. While it was easy to laugh at the situation, it raised the possibility that Trump might do something rash like attempt to fire or demote Powell, potentially leading to a legal crisis.
Now, the situation seems to have reversed. By picking Stephen Moore and Herman Cain for the Fed’s Board of Governors, Trump is finally slapping his own personal brand of crass political cronyism on the central bank. Neither Moore, a conservative economics pundit mostly known for his magical thinking about tax cuts, or Cain, a former pizza executive and failed presidential candidate, belong at the Fed by any traditional standard. But both are staunch supporters of the president and probably can be relied on to take orders from his Twitter feed. The funny part of it is that, just as the president is finally figuring out how to exercise a little bit of influence over monetary policy, his ideas about it appear to be flying off the deep end. Maybe Trump is getting bad advice from the very sycophants he’s nominating to the Fed board. Maybe he’s just become more strident on his own. Either way, the joke’s on us.
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