Trump’s Monetary Policy is Economically and Ethically Confused

It was strange watching a Republican president criticize the Federal Reserve for its latest interest rate hike (the Board of Governors voted to raise the rate by a quarter-percent to 2.25). Gone were the days of a laissez-faire GOP lauding small government and market efficiency (though I already suspected this). The thought that government might exit the money market was now a “crazy” idea — a “mistake.”

Trump’s lament makes sense from the standpoint of GOP strategy. The economy is entering a tenth year of growth despite signs emerging of a looming slowdown. With congressional Republicans highly exposed going into the midterms and the White House up for grabs in two years, President Donald Trump has every reason to want to keep money moving. For stock prices to keep rising and unemployment to stay low, dollars need to be chasing dollars (profit in a nutshell).

That becomes tougher (at least in theory) when the cost of borrowing rises. Firms can’t source funds as easily. People get stuck in smaller homes and old cars. All because money is staying at the bank where it earns interest.

Add to all this that Trump can’t punish the interest-rate decision makers (the Fed’s governors have fixed fourteen-year terms) and his narrative ties out. In the Trumpian calculus, this is a classic moment of elites bulldozing the common man. It’s the same rule-by-experts that has drawn the ire of populists globally.

I have misgivings about the technicals of Trump’s analysis. The effective Fed funds rate is still ultra-low by historical standards. Current rates seem to be pricing in growth expectations more than inflation anxiety. The yield curve — a visualization of interest rates offered on different-length bonds — looks finally to be steepening (a refreshing change from the old talk of “inversion,” which most economists take as a sign of oncoming recession). In other words, the higher interest rate is not only not a reason to panic; it’s actually a sign of health.

But I have other misgivings too — more in the way of principle. It’s extremely unusual for a sitting president to bully the Fed, which is politically neutral by its charter, into pursuing a particular monetary policy. The only other instance we know of is Richard Nixon, whose back-room “arm-twisting” came out under warrant.

It also reads like plutocracy for a president to defend the Fed’s bond buyback program — which was designed to relieve the major banks of $800 billion of debt after the Great Recession — while slimming down spending on welfare, disaster relief, and the arts.

Perhaps most jarring though is trying to situate Trump in a tradition of free marketeers, as Republicans so often present themselves. I myself tried locating Trump’s comments alongside Ronald Reagan’s sermons against government intervention, George H. W. Bush’s promises to stonewall new taxes, and Mitt Romney’s talk of an over-dependent “47 percent” (a jab directed at Americans who collect government benefits without paying income tax). Trump’s comments seemed to lay bare a kind of two-facedness in the party.

There is the distinct sense, hearing Trump speak on the economy, that we are living on the ruins of a bygone Republican civilization. Radical individualism and corporate interest are all that’s left of the old pillars. Lindsey Graham, Jeff Flake, and — bar an upset in Texas’s November Senate race — Ted Cruz are its custodians.

It can be easy in that environment to spar over the technicals of governance, where the Republicans are more obviously exposed. These retorts often feel too self-assured, though. They ignore the real undergirding questions of economics, which are as much about society’s value frameworks — how we assess justice in process and outcome — as about the S&P 500’s daily close.

Whether it is “good” policy for the Fed to continue flooding the economy with dollars and lapping up securities is not a settled question. Trump has been clear that he views the balance sheet reduction as dangerous to continued prosperity. There are reasons to be skeptical of that position. Trump is implicitly advocating for long-term intervention in money markets — in other words, a new era of government distorting economic outcomes in favor of large financial institutions. The question of economic “values” is obviously relevant here.

I happen to think, like the Fed governors, that quantitative easing has run its course and that ending it will not stifle productivity. I also place a premium on a culture of corporate responsibility, which I worry we’ve watered down with a decade of government buybacks. For their part, many investors seem to side with Trump, perhaps hoping for a weak dollar in the long-term.

What we’re left with is a split democracy: One for the people; the other for the shareholders.

Henry N. Brooks ’19 is a Social Studies concentrator in Currier House. His column appears on alternate Thursdays.