Jerome Powell is right to stand up to Trump’s bullying

One has to admire Federal Reserve Chairman Jerome Powell’s courage. In a town where very few have stood up to President Trump’s bullying, Powell has distinguished himself by not allowing Trump’s incessant personalized abuse to knock him off course from pursuing the Federal Reserve’s dual mandate of low inflation and high employment.

Powell’s courage in not bending to President Trump’s bullying stands in sharp contrast to that of the Republican controlled Senate, which has hardly covered itself in glory by failing to resist Trump’s pursuit of economic policies that fly in the face of long established Republican Party economic principles.

Despite eight years of castigating President Obama for high budget deficits and for excessive public debt even at a time that a weak U.S. economy desperately needed fiscal support, virtually no Republican senator opposed President Trump’s 2017 unfunded tax cut. They did so even though that tax cut has now caused the budget deficit to balloon to more than a trillion dollars a year for as far as the eye can see and has now put the U.S. public debt on a clearly unsustainable path. They also did so even though the last thing that a U.S. economy at close to full employment then needed was a big fiscal stimulus.

The same too might be said of the Republican Senate’s response to Trump’s protectionist trade policies that have now contributed to a troubling global economic slowdown by raising the specter of a world trade war. Despite for decades being the party in favor of free trade, the Republican Senate has done little to rein in the president’s unbridled trade policy authority for fear of incurring his wrath as they too face re-election.

To be sure, Powell is not the first Federal Reserve chairman to face political pressure from the White House for lower interest rates. After all, virtually every president once in office has been in favor of low interest rates especially in an election year. But Powell is the first Fed chairman to be subjected to such a constant barrage of personal and public abuse. He is also the first to be subjected to repeated threats of being fired before his term expired.

If this year Powell has had to put up with constant White House harassment and pressure, next year is bound to be worse for him.

In the run up to next year’s election, one must expect that Trump will keep calling for aggressive interest rate reductions and for a return to Fed bond buying. He will do so in the hope of artificially boosting the U.S. economy and keeping the stock market very high as a means to secure his reelection. He will do so even though unemployment might remain at close to its fifty-year low and inflation might be at close to the Fed’s target range.

Being the skillful politician that he is, Trump will also find it highly useful to keep setting Powell up as the fall guy to take the blame for any faltering in the U.S. economy next year. By blaming Powell’s reluctance to aggressively cut interest rates for any economic setback, Trump will hope that voters will not attribute the blame for any such slowdown to his reckless America First trade policy or to his allowing the budget deficit to balloon at a time of economic strength. 

For the sake of the future long-run health of the U.S. economy, one must hope that Powell will maintain his resolve in standing up to the president as the political temperature rises. If not, there is the real risk that the United States will come to resemble the Turkeys of the world, where monetary policy is run primarily for short-run political gain rather than for the goal of keeping inflation under control and employment on a steadily rising path.

Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.