Donald Trump has spent much of his presidency trying to undermine the independence of the Federal Reserve — first by publicly berating his own handpicked Fed chair, Jerome Powell, and then by nominating a pair of spectacularly unqualified loyalists to its board of governors.
On one level, the president’s meddling has validated the rationale behind the central bank’s independence. The crass, self-interested nature of Trump’s motivations on monetary policy (like his motivations on all other subjects) has been transparent. The mogul isn’t interested in what’s best for the American economy in the long run; he’s concerned with what’s best for his reelection prospects over the 565 days between now and the 2020 vote. Which means he would like the Fed to keep interest rates low, to juice short-term economic growth, even if that means heightening the risk of inflation or financial instability in the medium term. Thus, it is ostensibly fortunate that Powell and his band of bland technocrats are not directly accountable to the White House.
On the other hand, Trump’s critique of the Fed happens to be right.
The central bank has a dual mandate to promote price stability and full employment. Conventional economic theory holds these two objectives to be in tension: If the labor market gets too tight, workers will be able to demand wages in excess of their productivity, firms will adjust by raising their prices, workers will respond by demanding higher wages, and, eventually, too much money will be chasing too few goods, and inflation will spiral out of control.
To prevent that from happening, the Fed seeks to maintain the lowest possible unemployment rate compatible with its 2 percent inflation target: If inflation appears on pace to exceed that threshold, the central bank will “cool off” the economy by raising interest rates.
But in recent years, the appearance of imminent, higher than 2 percent inflation has been exclusively in the eye of the beholder. The central bank has repeatedly raised interest rates — thereby suppressing employment opportunities and wage growth for America’s most desperate workers — in the name of fending off inflation spikes that never came. The Fed has undershot its 2 percent target over and over, while dampening economic growth in the process. Trump’s belligerent calls for the bank to leave well enough alone may have been ineloquent and ill-intentioned. But they were also basically correct.
Or so the Federal Reserve now appears to believe:
Federal Reserve chairman Jerome Powell and his colleagues have made an important shift in their strategy for dealing with inflation in a prelude to what could be a more radical change next year.
The central bank has backed off the interest-rate hikes it had been delivering to avoid a potentially dangerous rise in inflation that economic theory says could result from the hot jobs market. Instead, Powell & Co. have put policy on hold until subpar inflation rises convincingly.
“The Fed is evolving to a ‘whites-of-the-eyes’ approach in terms of inflation’’ under which it won’t hike rates until price rises accelerate, said Stephen Stanley, chief economist at Amherst Pierpont Securities LLC …
As the Fed embarks on a yearlong review of its monetary-policy framework, Powell’s also shown willingness to seriously consider an approach under which the central bank would seek price rises above its objective for a while.
This is good news for the American worker. Our central bank is now going to avoid throwing people out of work in the name of fighting inflation until there is actual evidence that such inflation exists. And it might even start treating its 2 percent inflation target as a target instead of a ceiling — which is to say, a level that it is just as worried about undershooting as overshooting.
Unfortunately, at this moment in our history, what’s good for the economy is not necessarily great for the republic. Trump’s greatest political asset is the expansion he inherited. And the Fed’s newfound interest in rational monetary policy reduces the likelihood that the president will squander that inheritance between now and November 2020.
What’s more, the Fed isn’t the only institution that has given Trump good economic news this week. As the Washington Post reports:
A noticeable shift has taken place on Wall Street and among many economists and business leaders in recent weeks: Fears of an imminent recession have faded and been replaced with cautious optimism, especially about 2020, a trend that bodes well for President Trump as he seeks reelection …
“After the weak start, growth is projected to pick up in the second half of 2019,” IMF chief economist Gita Gopinath wrote in a blog post.
The IMF isn’t alone in its optimism. The U.S. stock market had one of its best starts to the year since 1998 and is now within striking distance of hitting an all-time high. Goldman Sachs says the likelihood of a recession in the next year has been cut in half, to 10 percent.
There’s a plausible story to tell that explains why this optimism has taken root: A U.S.-China trade agreement looks likely, the Chinese economy appears to be stabilizing, and the Federal Reserve (along with other central banks) has shown it will do whatever it takes to keep this expansion going.
Even if Wall Street’s rosiest projections for the 2020 economy prove true, it’s far from certain that Trump’s skin will be saved. The president’s approval rating remains poor, and a large majority of the country still expresses a preference to see him evicted from the Oval Office next year. Polls show that most voters already approve of Trump’s handling of the economy; a majority simply feels that his economic management does not compensate for his myriad other shortcomings.
But it’s increasingly plausible that Trump will get exactly what he wanted out of Powell — and thus the 2020 electorate.