Trump’s political dig on Yellen more dictatorial than presidential

Bullying elected officials is nothing new for Donald Trump. But the choice of his most recent target, Fed Chair Janet Yellen, has a different sort of consequence than sneering at Marco Rubio or questioning John McCain’s valor in Vietnam.

When Trump said Yellen was being “obviously political” and “should be ashamed of herself” for keeping interest rates low, he crossed a line that many economists consider sacrosanct. And he hinted, yet again, that his preferred leadership style looks more like Vladimir Putin’s than that of a democrat (with a small d).

{mosads}In an economy confronted by strong global headwinds — from slowing emerging markets to Brexit — Fed policymakers have chosen to keep interest rates low. Mr. Trump suggests though that Chair Yellen specifically is keeping rates low to spur the economy and bolster President Obama’s legacy. To be clear, there are smart people who sincerely oppose Fed policy, but no one seriously suggests that Yellen is a shill for Obama.

How do we know Trump’s not just a monetary hawk at heart? Up until recently, Trump himself advocated for low rates. In May, Trump said Yellen was a very capable person, that he is a “low interest rate person”, and that raising interest rates right now “would be a disaster.”

On a side note, given Trump’s concern with unemployment — he says, flying in the face of reality, that it’s as high as 42% — the right monetary policy would be low interest rates to stimulate growth and create jobs. So if Trump’s concern were purely on policy grounds, we would expect him to essentially call for QE4.

But for Trump, it’s about politics, not policy. Trump is trying to manipulate the actions of the Federal Reserve to help his electoral odds. And it could work. By calling out Yellen for being political, he is overtly pressuring the Fed to raise interest rates to prove otherwise. This of course would likely slow down the economy, as an interest rate hike typically does. And a slowing economy almost always harms the incumbent party.

In this regard, Trump is taking cues from his authoritarian idol Vladimir Putin, who has been accused of coercing Russia’s Central Bank into doing his bidding. In May 2015, the Russian Central Bank unexpectedly announced a cut in the interest rate against the recommendation of almost every regional economist. A cut in nominal interest rates was an odd prescription at a time when the country was facing double-digit inflation.

Politically though, since cutting interest rates stimulates the economy short-term, it helped Putin’s popularity. There is no direct proof that the Kremlin interfered with the supposedly autonomous Russian Central Bank, but it’s safe to say that Putin, who likely rigged his last election, wouldn’t have any moral quandaries about doing so.

Trump’s attempt to influence Fed policy violates a longstanding principle adhered to on both sides of the aisle: that the Fed’s monetary decisions remain autonomous. Nobel-Prize winning economists Robert Lucas and Thomas Sargent explain that when elected leaders exert control over interest rates, they have a dangerous incentive to lower rates and hike inflation in election years to provide a short-term boost.

Once markets catch on to this behavior, inflation becomes expected. Often, before a central bank can respond, businesses raise prices in anticipation, and an upward spiral has begun. It’s an unfortunate reality that just the expectation of inflation can actually cause inflation.

And that’s exactly why Trump’s comment this week matters more than his typical insults. If Trump wins, he will select Yellen’s successor in 2018. Come time for the 2020 election, does anyone think Trump would keep his mouth shut on interest rates out of respect for Fed independence? If candidate Trump couldn’t resist, why would President Trump? And when he does speak on the matter, Trump the monetary dove will likely reemerge, pressing the Fed to lower rates and stimulate the economy before the election.

The very fact that markets may expect a President Trump to pressure the Fed is all that’s needed to set off inflationary pressures. When that happens, and consumers’ purchasing power evaporates, it hurts consumers generally and those on fixed incomes, like seniors, particularly.

With his Yellen insults, Trump is clearly undermining the economy. The only potential beneficiary is Trump himself and his quest for an authoritarian grip over a critically self-governing institution like the Fed. Vladimir Putin must be very impressed.

David Brown is the Deputy Director for Third Way’s Economic Program. (dbrown@thirdway.org) Ryan Bhandari is an Economic Policy Advisor for Third Way. (rbhandari@thirdway.org)

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