Trump vs. The Fed: Who’s Right?
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- President Donald Trump and Federal Reserve Chairman Jerome H. Powell have been butting heads lately over interest rates.
- The Fed’s current policy is to gradually raise a key interest rate that influences interest rates across the economy as a whole.
- Trump thinks that policy could disrupt the U.S.’ economic recovery.
Deeper dive
Check out Countable’s explainer on the Federal Reserve for a detailed look at what the Fed is, how it operates, and why it can be controversial.
Regarding interest rate policy, as the economy grows, inflation typically rises as well. If inflation gets high enough, it can erode consumers’ purchasing power, so the Fed will often raise interest rates with the aim of constraining inflation.
Inflation reached a six-year high of 2.3 percent annualized gain in July, and there’s evidence that consumer attitudes are already being weighed down by inflation, all but guaranteeing that the Fed will continue raising interest rates.
Trump objects to this policy, saying it could put the U.S. at a disadvantage relative to other developed economies. In an interview on CNBC, Trump said:
“I’m not thrilled… Because we go up and every time you go up they want to raise rates again. I don't really — I am not happy about it. But at the same time I’m letting them do what they feel is best… But I don’t like all of this work that goes into doing what we’re doing.”
A USA Today analysis explains Trump’s position thus:
“Trump sees interest rates through two perspectives. From the standpoint of a borrower, which Trump largely was in his professional life, low interest rates fuel business expansions.
“As president, Trump is fixated on trade balances. A weaker dollar advantages exports and disadvantages imports.
“So, Trump is a weak dollar guy.”
Powell explained last Friday that the Fed is working to normalize interest rates that it has held artificially low to fight the Great Recession:
“My colleagues and I are carefully monitoring incoming data, and we are setting policy to do what monetary policy can do to support continued growth, a strong labor market, and inflation near 2%.”
Independence
The Fed is an independent federal agency, and its independence from political interference has been a hallmark of its existence.
That said, the Constitution gives authority over money to Congress. As the USA Today analysis notes, “The Fed is a creature of statute, its independence a congressional policy decision, not a status enjoyed as a matter of right.”
Some observers have perceived Trump’s unprecedented criticism of the Fed as an attack on its independence. In a recent Reuters interview, when asked whether he believed in the Fed’s independence, Trump responded, “I believe in the Fed doing what’s good for the country.”
Stock prices fell after Trump’s comments and rose after Powell’s, suggesting that investors are nervous about any hint of a threat to the Fed’s independence.
However, some argue that the value of an independent central bank “making up monetary policy on the fly” is increasingly in doubt, and others wish to see greater oversight of Fed activities.
What do you think?
Do you support the Fed’s policy of gradually raising interest rates? Do you support the Fed’s current level of independence? Hit Take Action to tell your reps what you think, then share your thoughts below.
—Sara E. Murphy
(Photo Credit: iStock.com / 400tmax)
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