Trump preps his scapegoat for the next recession: The Fed

On the eve of a two-day meeting by the Federal Reserve’s decision-making Federal Open Market Committee, President Trump took to Twitter to register his feelings about possible interest rates hikes:

“It is incredible that with a very strong dollar and virtually no inflation, the outside world blowing up around us, Paris is burning and China way down, the Fed is even considering yet another interest rate hike. Take the Victory!” Trump tweeted. 

For those puzzled by the victory comment, I share your confusion.

{mosads}The Fed has been rather clear about continuing to raise the federal funds rate, the interest rate it targets. With unemployment low, GDP growing at a solid pace and inflation already right around the Fed’s 2-percent target, the Fed sees a real chance of the economy starting to overheat.

Interest rate changes affect the economy with a time lag, usually somewhere between 6 months and 2 years. So the Fed always worries about where the economy is headed in the next year or so, not just about the inflation rate or state of the economy at the moment.

President Trump’s public comments about the Fed have combined two elements: strong claims about how the president’s economic policies have put the economy in a great spot and preemptive positioning to blame the Fed when the next recession comes.

With an eye on the 2020 election, the president has made it quite clear that he would like the Fed to lay off those interest rate increases.

Before getting to the politics of the situation, let’s take a look at the actual economics. After all, that is what the Fed is supposed to think about. Does it look like the economy is heating up or slowing down?

The news about unemployment and GDP seem to weigh more on the heat-up side. In the past, unemployment this low has led to surges in wages, resulting in higher inflation. The Fed has learned to nip these signs of inflation in the bud to avoid a difficult, protracted battle with inflation down the road.

However, despite widespread stories about companies having difficulties finding workers, wages just are not growing that fast. Theories abound, but it does seem that inflationary pressures from the labor market are not nearly as intense as in the past.

The lack of wage increases might mean that the economy is not yet overheating. Is there a reason to think that the economy is actually already cooling down? Housing prices, a key indicator of demand and expectations, have softened a lot.

Trade tensions with China have started to bite, affecting many farm areas in the country. Share prices have dropped this week. Some sectors of the credit markets are showing signs of significant losses. It is starting to look like the economy has reached the peak of the business cycle.

However, the Fed has another reason to raise rates now. Fed officials have expressed concern that their ability to help the economy when the next recession does come along will be limited by the low level of interest rates now. Getting in a few more small rate increases might be helpful in that regard.

The Fed has always said that it will look carefully at economic data rather than blindly stick to a predetermined plan. It might well turn out that 2019 will see fewer rate increases than initially anticipated.

But this is also where the political element kicks in. The Fed is no stranger to political pressure. But never has a president been quite so blunt and public in his criticisms of the Fed. Maintaining the Fed’s independence is a critical task for Fed Chairman Jerome Powell.

It might be tempting to raise rates just to show that the Fed will not accept dictation from the president. But the Fed will probably just try to shut its collective ears, look at the data and make the best decision it can for the U.S. economy.

Evan Kraft specializes in the economics of transition, monetary policy and banking issues as a professor at American University. He served as director of the research department and adviser to the governor of the Croatian National Bank.