Later this afternoon, we’ll have the first rate cut (likely by the time you read this). If the Fed doesn’t do it, expect significant market reaction and an explosion from Mr. Trump. You can make a case either way, cutting or hiking. There is global weakness leading to increased monetary ease abroad. If we don’t ease in the wake of this, the dollar will rise further, making our exports even less competitive. And our business investment has slacked off recently. On the other side, we still have very hot and tight labor markets, and a slight uptick in core inflation recently. In a normal era, we would certainly be looking at increasing interest rates. But the Fed’s talk of “normalization” of monetary policy has curiously gone silent; all that seems certain is the Fed “put” on the market (ensuring the stock market won’t go dramatically down because the Fed will pump up the money supply) is still in play.

Regular readers know that I don’t know if interest rates should increase or decrease, but what I’m certain about is that the Fed will get it wrong–because the interest rate is a price, and price fixing always leads to surpluses or shortages. But interestingly, because of the money and credit creation process, we’ll have too much money and credit for some, with too little for others.* I’m in favor of letting markets set interest rates rather than politicians or political appointees.

But the interesting issue today is how will the Fed be perceived? Will they still be viewed as “independent” of politics, or will they be viewed as caving to Mr. Trump? I’m not in favor of having a central bank, but if we do have one, it needs to be as independent of politics as possible. The economic literature is quite one-sided in favor of central bank independence. Not necessarily goal independence (e.g., the politicians can say focus on low unemployment) but independence in how they do their job. Think about it: Do you really want Nancy Pelosi, or Donald Trump, or Mitch McConnell deciding what interest rates should be? Mr. Trump’s public attacks on the Fed are historically unprecedented, although many former presidents leaned just as heavily on the Fed privately (e.g., Richard Nixon). Yet the biggest reason that most businesses are highlighting as creating uncertainty are Mr. Trump’s ill-advised trade wars. Monetary ease cannot overcome the global supply chain restructuring that his trade wars are causing. Markets abhor uncertainty, whether it be Mr. Obama’s regulatory uncertainty or Mr. Trump’s trade uncertainty.

I was explaining some of this recently to an older friend (and big Trump supporter), who let me know that Mr. Trump was “playing the long game” on trade. Yes there is short term pain, but there will be long term gain as we get better deals. I’m very skeptical of Mr. Trump’s long term focus–his eye looks singularly fixated on Nov 2020 to me. And his public pressure on the Fed is just more proof of that for me.

*Lower interest rates tend to favor credit toward longer lived capital projects, whereas higher interest rates favor investments that pay back quicker.