November 13, 2019

Trump's Tough Choice

“Back in May, I wrote about President Trump’s failure to assert control over the Federal Reserve and the monetary policy it makes. Trump declared the Fed should cut short-term interest rates by half a point at its May meeting; the Fed ignored him, keeping rates unchanged. The Senate, too, ignored his stated desire to appoint two political cronies to the Federal Reserve Board.

Now, a month later, members of the Fed Board are talking openly about the possibility of rate cuts. Their comments have, in a way, been precipitated by the president’s actions. So maybe the president does have a lot of sway over the Fed after all. But it’s not the kind of sway that’s very useful to him.

Let me explain.

While the Fed has taken pains to publicly ignore the president’s comments about monetary policy, it is quite responsive to the financial markets. When stock prices and long-term interest rates fall, that can be a sign of a worsening economic outlook. A worsening economic outlook can be a reason for the Fed to cut rates; lower rates make it easier for businesses and consumers to borrow and invest, and can therefore prop up economic output when other drivers of the economy are weak. And the Fed particularly wants to ensure that the markets know that if the economic outlook does worsen, it will respond appropriately, with rate cuts.”

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