An Urban's Rural View

While in many ways Donald Trump is a president like no other, in his unhappiness with the Federal Reserve he differs little from his predecessors. Truth to tell, no president has ever liked it when the Federal Reserve raised interest rates on his watch. If there's a difference, it's that most other presidents kept their unhappiness to themselves.

Not Trump. He has attacked the interest-rate increases in shrill terms. "I think the Fed has gone crazy," he said on one occasion. On another, he switched to Spanish, saying "The Fed is going loco and there's no reason for them to do it. I'm not happy about it." On still another occasion, he said "The Fed is going wild."

(https://www.cnbc.com/…)

If you're an agricultural producer with big borrowings and thus big worries about rising interest rates, you may be tempted to cheer the president on. Perhaps, you might hope, the Fed will wither under presidential criticism and pull back.

Alas, that isn't likely. To the contrary, most recent presidents have avoided Trump-like venting about the Federal Reserve precisely because it not only doesn't work, it can prove counterproductive.

The Fed is an independent agency. It's supposed to exercise independent judgment on how best to minimize inflation and unemployment, not bow to the president's wishes. Indeed, in the case of a close call, the Fed might well consider the president's public criticism a point in favor of raising rates, just to demonstrate it's independent and can't be cowed.

Hence this headline on a Wall Street Journal editorial: "Trump Flunks Fed Politics." (https://www.wsj.com/…) An A-student president who preferred lower rates would simply appoint Fed governors who share his preferences.

Trump's economic advisors, cleaning up after the president, have been quick to reassure markets that Trump has no intention of firing Fed chairman Jerome Powell. Actually, it's not clear he has the legal authority to fire him. Congress could undo the Fed's independence if enough Congressmen were so inclined, but as the Washington Post has reported, Powell has been skillfully shoring up support on Capitol Hill. (https://www.washingtonpost.com/…)

It's unlikely, then, that Trump's attempt to bully the Fed will work. Even so, there's no reason to fear the Fed will "go wild." Reasonable people can and do differ on whether rates should be raised, but nothing in the Fed's recent past or in the signals it's sending about the future suggest it's going to move wildly fast or wildly far.

It has taken the Fed nearly three years to lift its benchmark interest rate from near zero to around 2%. In other words, it has moved slowly and steadily. The Fed's guidance, while necessarily ambiguous, calls for another year or so of quarter-point increases, taking rates to around 3% or so. Again, slow and steady, ending up at a "neutral" level, one that the Fed hopes will neither stimulate the economy nor restrict it. (https://www.dtnpf.com/…)

Whether the Fed would go beyond neutral and try to slow the economy is unclear. There are people on the Fed's voting committee who favor that. Others oppose it. A lot will depend on how fast prices are rising a year or two from now.

Prices are currently rising at a rate near the Fed's target of 2% a year but if the economy continues to grow rapidly inflation could easily spin out of control. There are already signs that rising tariffs, labor costs and consumer demand are driving companies to raise prices. (https://www.wsj.com/…)

The case for hiking holds that it's better to make small increases in rates now than be forced to make bigger ones if inflation takes off. Don't forget that in the '70s inflation got so far out of hand that it took years of double-digit interest rates and a deep recession to tame it.

There is, in other words, a reasonable argument for these rate hikes. They make President Trump unhappy, they make farmers and other business borrowers unhappy, they even make Wall Street unhappy. With all these people against them, the Fed may well be wrong. But it isn't going crazy. The Fed is, if anything, abiding by conventional wisdom, which says it has too often in the past been too slow to raise rates.

Built into the Fed's plans is an assumption that strong economic expansion continues. It might not. Just below the surface of the latest strong GDP report were some warning signals of possible future weakness. Should they be borne out, should the economy stumble, the Fed can and will stop raising rates. If the stumble is severe enough, it could even lower them.

What the Fed most likely won't do is reverse course just because the president is bashing it. There are limits to the power of presidential tweets.

Urban Lehner can be reached at urbanize@gmail.com

(ES)

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