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Mr. Trump’s Monetary Machinations

23 Jul 2018

Mr. Trump extended his economic mischief this past week by opining that the Federal Reserve should slow down the rate hikes, as these hikes are leading to a stronger dollar (true) and hurting the U.S. (false).  Now Mr. Trump is just doing what politicians of all stripes (especially politicians that follow Keynesian economics) have often done–they usually want an easy money policy that keeps the good times rollin’ while paying little heed to the long term consequences.  It is true that this is seldom done publicly by Presidents, but members of congress routinely call on the Fed to be accommodative.  Some Presidents lean very hard on the Fed, most notably Mr. Nixon’s push on Arthur Burns to help him win the ’72 election, but also the Roosevelt and Truman administration’s push for low interest rates to ease borrowing costs for WWII.  It’s hardly surprising that the former real estate developer would generally be in favor of lower interest rates.  Jim Grant, as often is the case, was particularly prescient on this:

Grant: Trump’s markets are set up for Trump’s success from CNBC.


Mr. Obama met routinely with Mr. Bernanke, and I feel quite confident they didn’t just talk about the weekend golf game.  What’s different about the Trump approach is the same way he does everything else–publicly calling out people he disagrees with.  I would counsel him against such approach, but the idea he is doing something other presidents have not done is ridiculous, at least to me.  He’s just doing it differently.  It’s actually likely his public approach will lesson the Fed’s ability to slow down, just to show their own independence. With prices above the inflation target, they need to ensure that they don’t let the tiger out of cage–most importantly inflationary expectations.  If markets believe that the Fed were actually submitting to Mr. Trump’s demands, they would likely increase the inflation premium, which would result in yet higher interest rates.

But of course he is completely wrong on the harm of a strong dollar.  The strong dollar is a headwind for exports, but looking back at historical periods of a strong dollar, the U.S. economy is always robust in those times.  Indeed, those go together.  It is precisely the strong Trump economy that is causing foreign investors to want to come to the U.S., which necessitates buying dollars.  To gain those dollars for investing in America, they have to give us more imports (and yes, Mr. Trump, imports are actually something we want, or we wouldn’t freely exchange our dollars for them).  This of course means our trade deficit goes up, to balance the capital account surplus.

So Mr. Trump, if you want a weaker dollar, and a smaller trade deficit, stop making America great again.  But to do the latter, you’re going to get the former.

But the lesson here is not that Mr. Trump shouldn’t be manipulating interest rates, but rather why is anybody manipulating them?  We don’t need any politician or political appointee to do this for us–the market can price the interest rate just fine without the Fed or Mr. Trump.  Oh where are you Ron Paul?