As 2018 draws to a close, there is growing concern about what the next year will bring for the American economy. President Trump’s twin self-inflicted wounds of an ongoing trade war with China and a needless government shutdown helped send stock markets into a December panic. The expanding global economy, too, shows signs of a slowdown, as evidenced by sputtering Germany factories, sluggish Chinese retail sales and a cooling U.S. housing market. But still solid U.S. GDP growth and strong holiday sales point to an American economy that is more solid than fluctuating markets would suggest. That’s why “the real risk is not that insurmountable challenges knock the economy off course,” Neil Irwin cautioned in the New York Times, but “that poor leadership converts moderate economic shocks into a crisis.”
By “poor leadership,” Irwin had in mind the current occupant of the Oval Office. It was bad enough that he dispatched his Treasury Secretary Steve Mnuchin to reassure the world about the health of U.S. banks, a mysterious announcement that only served to cause concern where there had been none. But making matters worse is Trump’s unprecedented campaign to scapegoat the Federal Reserve.
Not content to proclaim “the only problem our economy has is the Fed,” Trump has been complaining for weeks that “they’re raising interest rates too fast.” In recent days, he lamented that under his handpicked Chairman Jerome Powell, the Fed has “gone crazy” and will “turn me into Hoover.” By Thursday, chairman of the White House Council of Economic Advisers Kevin Hassett countered rumors that the president would take the previously unheard of step of sacking the Fed Chairman, declaring Powell’s job “a hundred percent” safe. Those were doubtless calming words to those like David Rosenberg of wealth management firm Gluskin Sheff who fretted earlier in the week:
“If Powell gets terminated, what we’ve seen happen in the markets in the past few weeks will look like a walk in the park.”
Whether or not Donald Trump has a point about the pace of interest rate increases (more on that later), his norm-shattering threats directed at the Federal Reserve are doubly disturbing. After all, other presidents who faced the prospect of the Feds putting the brakes on an economic expansion showed restraint altogether lacking in number 45. And as it turns out, the bellyaching over interest rates from Donald Trump and his Republican allies is a gymnastic reversal on the position they espoused when Barack Obama was in the White House.
Take, for example, candidate Trump’s statements during the 2016 campaign.
The answer to this question posed on Facebook is “no.”
That September, the GOP nominee accused then Fed-Chairwoman Janet Yellen of aiding Barack Obama and Hillary Clinton. “The Fed is obviously not independent,” he said, “It's obviously not even close to being independent." Repeating his August 2015 charge that “we’re creating a bubble” that “could explode,” Trump insisted the U.S. was “in a big, fat ugly bubble.” But the Fed held interest rate at near-zero following the 2008 financial collapse to help drive economic activity during the extended period of slow recovery and lagging demand. The situation had changed by 2015, with lower unemployment, steady GDP growth and the first real wage gains. Nevertheless, former Pennsylvania Senator and failed GOP presidential candidate Rick Santorum took to CNN this week to repeat Trump’s charges of favoritism:
“I know it’s frustrating to him [Trump] to see the Fed prop up the Obama economy for eight years at zero interest rates as Obama’s tax and regulatory policies strangled the American economy. And as soon as Trump comes in and un-strangles the economy, well the Fed comes in and tries to tighten it.”
Leave aside for the moment Santorum’s whitewashing of the Obama boom Trump inherited. During his 2012 White House bid, Senator Santorum rejected the very idea that the Federal Reserve should have a dual mission of fighting inflation and ensuring full employment. As he put it during a September 12, 2011 Republican presidential debate:
“I think the second charter that was instituted that had it be responsible for increasing employment and dealing with that leads to a fundamental distrust among the American people that they are taking their eye off the ball, which is sound money. They should be a sound money Federal Reserve. That should be their single charter, and that is it.”
Texas Governor Rick Perry, now Trump’s Energy Secretary, certainly agreed. Ben Bernanke’s policies of zero interest rates and quantitative easing, Perry said, was a “travesty that young people in America are seeing their dollars devalued.” He added, “if you are allowing the Federal Reserve to be used for political purposes, that it would be almost treasonous.” (Perry was only reiterating his comments from the prior month, when he told an audience in Iowa that “printing more money” is “treasonous,” before adding, “I don’t know what y’all would do to him in Iowa, but we would treat him pretty ugly down in Texas.”)
For his part, future nominee Mitt Romney agreed:
“Well, my own view is that, quite simply, that the Federal Reserve has a responsibility to preserve the value of our currency, to have a strong American currency, such that investors and people who are thinking about bringing enterprises to this country have confidence in the future of America and in our currency. People will not invest in this country and create jobs in this country for the American people if they don't have belief in our currency.”
Now, prioritizing price stability over maximizing employment has been a Republican policy pillar since the inflation woes of the late 1970s. (Paul Volcker, the Fed Chairman during Ronald Reagan’s time, jacked up interest rates in 1981 precisely to crush inflation and drove joblessness to 10 percent by 1982.) But in September 2011, the unemployment rate was still 9.1 percent. In the wake of brutal recession which started in December 2007, neither inflation rates nor the rates on Treasury bonds showed any sign of “currency devaluation.”
That didn’t stop Mitt Romney’s future running mate Paul Ryan from attacking the Federal Reserve over policies designed to help jump-start the economy. Ryan repeatedly criticized the Fed for its "quantitative easing" program designed to help jump-start the struggling U.S. economy. Despite the utter absence of U.S. inflation then or since, then-House Budget Chairman Ryan warned, "the inflation dynamic can be quick to materialize and painful to eradicate once it takes hold." Even though inflation was running well below 2 percent at the time, Ryan slammed Federal Reserve Chairman Ben Bernanke in 2011:
Mr. Ryan all but accused Mr. Bernanke of devaluing the dollar, saying, "There is nothing more insidious that a country can do to its citizens than debase its currency."
But five years later, Ryan refused to give credit to President Obama for the economic turnaround (one which, it should be pointed out, blew past the six percent jobless rate Mitt Romney had promised by the end of his first term). As The Hill reported:
Instead of crediting Obama for any of the economic gains that have occurred in the last seven years, Ryan argued that the Federal Reserve's policies pushed the recovery.
During the 2016 GOP primaries, the Republican hopefuls largely echoed Trump’s charges of political bias at the Fed. As New Jersey Governor Chris Christie summed up the consensus view of the aggrieved Republicans:
This has been the most political Federal Reserve I've seen in my lifetime. Now, when they first cut interest rates during the economic recession and the crisis, that was the right thing to do. But they've kept those interest rates artificially low for one reason, and one reason only. Because they're trying to politically support Barack Obama and his agenda. And it's been wrong.
Now, Donald Trump is hardly the first president of the United States unhappy about Fed interest rate hikes creating the prospect of slower economic growth. But it’s Trump’s public brow-beating of and not-so-thinly veiled threats against the Federal Reserve Chairman that has broken new ground. As the Washington Post reported in July after one of Trump’s first outbursts:
“I’m not thrilled,” the president told CNBC. “I am not happy about it…I don’t like all of this work that we’re putting into the economy and then I see rates going up.”
For Trump, the comments represented the latest in a long line of busted presidential norms. Since the Clinton administration, the nation’s chief executives have declined to comment on Fed actions, out of respect for the independence of the institution and to avoid any hint of political influence over the nation’s money supply.
The Clinton experience is doubly instructive, both for the Fed’s actions and the president’s reaction to them. As you may recall, President George H.W. Bush lost his re-election bid in large part because of the recession of 1991. The U.S. economy, which grew by only 1.9 percent in 1990 and contracted by 0.1 percent in 1991, started to recover in 1992. GDP grew by 3.5 percent in 1992. The Fed Funds Rate, which hit 8 percent in late 1990, was slashed to less than 3 percent by the time Bill Clinton took office in January 1993. But as Senator Paul Sarbanes (D-MD) warned, Fed officials “say they're worried about inflation, but at the moment the more pressing issue is jobs and economic growth.” But by that fall, it was clear that Alan Greenspan’s Federal Reserve and the Clinton administration were at loggerheads over the Bank’s inflation hyper-sensitivity:
Last week Mr. Clinton was so worried that the Fed might sabotage his promise of stronger growth that he engaged in some unusually outspoken jawboning, saying, "There's no indication that we're facing a return of inflation." He added that until the economy produced "some real threat of inflation it would be inappropriate for us to choke off an economy that has already had a false start or two" since the 1990-91 recession ended.
Treasury Secretary Lloyd Bentsen joined the jawboning today by saying that with the economy growing at a 3 percent annual rate and inflation low, he saw no need for the Fed to push up interest rates.
"I don't see it in the current quarter or the next quarter," Mr. Bentsen said on the NBC News program "Meet the Press."
But despite the absence of inflationary pressures, Greenspan’s interest rate increases came fast and furious. By the end of 1995, the Fed Funds Rate was back in the neighborhood of 6 percent. Yet throughout, as Clinton press secretary Dee Dee Myers put it, “The Fed is an independent agency and we don't presume to control their decisions.” By November 1994, Greenspan and his all Republican board of governors hiked rates six times, the last of which was the largest since 1981. As the New York Times described the impact of that whopping three-quarter point increase at the time:
The increases are likely to show up immediately in the rates charged millions of Americans on everything from home equity loans to credit cards to small-business loans. Already, interest rates on 30-year mortgages that were available at slightly more than 7 percent at the start of the year have risen to 9.05 percent.
As economist James K. Galbraith fumed earlier that year, the Fed had taken all these growth-killing measures despite falling budget deficits and inflation nowhere on the horizon:
What is the justification for the quarter-point rise in short-term rates announced by Alan Greenspan, chairman of the Federal Reserve, last week? The stunning fact: there is none. He warned for months about the threat of rising inflation, yet each monthly price index report undercut his predictions. So now we have a pre-emptive strike -- a rise in rates to forestall an inflationary threat that all agree has not appeared.
Nevertheless, Bill Clinton and his economic team showed maximum restraint in the response to Greenspan’s moves:
The Clinton Administration responded to the Federal Reserve's action with restrained statements. Although President Clinton expressed hope this morning that Federal Reserve officials would "do their best to keep the recovery going," Treasury Secretary Lloyd Bentsen and the chief White House economic adviser, Laura D' Andrea Tyson, issued statements emphasizing the Federal Reserve's independence, avoiding any direct comment on interest rates while stressing the economy's overall health.
There were no rumors that President Clinton would somehow fire Alan Greenspan. His administration launched no campaign to undermine the Fed for its obvious bias for creditors over debtors, bosses over workers, and stable prices at the expense of greater economic growth and higher wages.
To be sure, as Vice President Joe Biden’s top economic adviser Jared Bernstein recently pointed out, presidents have, will, and arguably should take the Fed to task over the impact of its policies. But trying to educate the public and influence Federal Reserve policy, an institution which is after all independent of the three branches of government requires some tact and a persuasive case. Instead, President Trump as usual has resorted to insults, bombast and bomb-throwing, his trademark moves designed to undermine Americans’ confidence in his intended target.
All of which makes it very hard to take Donald Trump and his conservative water carriers seriously. There is, after all, a case to be made (as Matthew Yglesias and others have done) that Americans’ slow wage growth and concerns about the global economy argue against additional “premature” interest rate increases at this time. Of course, to make that case means Trump and his amen corner must acknowledge that his isn’t “the greatest economy in American history” and that the impact of the GOP’s much-hyped and over-sold tax cuts will be limited. More damning still, Jerome Powell was Donald Trump’s choice to replace Janet Yellen as Fed Chair, a woman whose only shortcoming in his eyes may have been literal. As Yglesias also pointed out, Trump continues to add inflation-fighters, a contradictory approach would only further discredit his claims about incompetence and bias at the Fed.
At the end of the day, our Whiner-in-Chief and his allies spent much of Barack Obama’s presidency demanding the Federal Reserve rein in its expansionist policies. Now might be a good time for Team Trump to learn a lesson most of us came to understand long ago: Be careful what you ask for.
