President Trump had an abundance of visible and vehement opponents to his America First agenda, but one of the most formidable foes confronted him from inside the federal government: the Federal Reserve System. As he pushed hard to reignite growth in the US economy with a bold lineup of tax cuts, business deregulation, and a trade war on China, the Fed was working to undercut everything he was doing.
The Fed had let the federal funds rate, the interest rate banks pay to borrow money from each other overnight, sit at 0 percent for almost the entire eight years of the Obama presidency. But in the first two years of the Trump regime, the Fed would raise it a startling eight times in a row. It would do so for no apparent reason, amid zero signs of rising inflation. That suffocated growth and killed animal spirits—which was precisely the Fed’s objective.
The Fed raised the federal funds rate fivefold in twenty-five months, from 0.5 percent in November 2016 to 2.5 percent in December 2018. If the fed funds rate rises, other interest rates also rise, from small-business loans and home mortgages to credit cards. The Fed’s hawkish rate hikes vastly increased the marginal cost of borrowing new capital at the whip end of the economy, in new loans and new investment for building new business. That blunted economic growth.
The Fed’s unwarranted and poorly timed policies had the same effect as if it were plotting to undermine the agenda of the newly elected president of the United States. For President Trump, that must have been infuriating and inexplicable. In mid-2018, he embarked on a pitched and protracted campaign aimed at jawboning the Fed into halting its relentless rate hikes and start lowering. It was the first time in thirty years that any president had called out the independent institution with a stranglehold on the US economy.
President Trump did it with alacrity. In the next six months, he would send seventy publicly reported messages to the Fed via interviews in the Oval Office, comments at rallies and press briefings, and exclusives on a succession of days with Fox Business, the Wall Street Journal, Reuters, Bloomberg, CNBC, and more. And tweets, lots of tweets.
He would prove to be right—the Fed’s incessant rate hikes were derailing the upturn in business investment and job growth that the Trump agenda had been creating with great success. That was of less importance to the pixel pundits and indignant economists who rose up to bash President Trump for bashing the Fed. They were aided, as always, by a media ecosystem that covered only the uproar rather than the underlying issues.
All of them were too busy haranguing the president for his caustic style and for daring to tread so publicly on the autonomy and credibility of the Fed. The racism angle so integral to Democratic opposition was unlikely to emerge in the arcane skirmish, so the dictator/authoritarian attack would be the go-to counterargument. By late 2018, they were in high dudgeon. Cue angry-face emojis across the mediascape.
A December 17, 2018, commentary on CNBC.com by a Villanova School of Business economics professor was headlined “Nixon All Over Again: Trump’s Fed-Bashing and Interest-Rate Panic Will Cause a Recession, Not Prevent One.” A June 24, 2019, New York Times article stated, “His grievances echo those voiced by presidents in the 1960s and ’70s, though his favored delivery channel—a social media account with more than 60 million followers—is far more public.” On July 31, 2019, a former CNN correspondent opined, “Trump is following the playbook of other authoritarian populists: embracing nationalist rhetoric and policies, developing an us-vs.-them narrative ahead of the elections and undercutting the independence of the Central Bank.” A Politico headline on September 11, 2019, read, “Trashing Fed ‘Boneheads,’ Trump Calls for Central Bank to Cut Interest Rates to ‘ZERO.’” In that story, David Kotok, a frequent commentator on CNBC and the chief investment officer at Cumberland Advisors, declared, “Trumpanomics of Fed bashing and trade war are an economic menace to the United States.”
A Forbes column on January 16, 2020, was titled “Trump’s Simmering Ire at Federal Reserve Chair Jerome Powell Defies Economic Logic.” On September 20, 2019, Alan Blinder, a former Fed vice chairman, provided a historical, if unkind, perspective on CNBC.com under the headline: “ ‘I Don’t Like Trump,’ but Presidential Fed Bashing Nothing New, Says Ex–Fed Vice Chair Blinder.”
None of the coverage addressed an insightful point made by the president: that the United States is the safest issuer of government bonds on the planet. Why should we pay higher interest rates to investors than those paid by governments in Europe that are wobblier than ours in terms of the chance that they may default on paying them back?
President Trump had pushed his tax plan past Congress, the stock market was on a happy tear, consumers were feeling buoyant, and the jobless rate was falling. Yet a bunch of government bureaucrat bankers in Washington were tripling or quadrupling the underlying cost of borrowing money that could help expand business and drive still more growth—and for no apparent reason at all, other than this one: because they could.
That was an unforgivable policy failure, yet the Fed never admits to a blown call. An old expression says military generals always fight the last war. Add that line to the old joke about the Fed—“often wrong and never in doubt”—and it describes the Fed of the Trump era.
The Federal Reserve is run by people who are sufficiently opaque and wizened to think that they can deliver stable markets and high employment as if they could conjure them up in their monthly meetings. They soon learn that they can’t do that. Yet they love trying to do so.
By one count, in a previous run, the Fed had gotten it wrong on nine rate moves in a row. Clearly, it got it wrong eight times in a row in the first two years of Trump. Its paranoiac fears of inflation preempted all other judgment—and not even an actual rise in prices, just a rise in consumers’ anticipation that prices might rise soon.
That would have been less intolerable if the Fed had had more humility, if it had been consistently modest in its actions and quiet in its pronouncements. The markets would have been a better place. Instead, we saw a Fed pose of stentorian gravitas as it hewed to a policy mired in inertia or simple indifference.
When Donald Trump arrived in Washington, he possessed special wisdom from forty years as a real estate developer in New York, gaining insight into the credit markets, capital investment, the animal spirits of capitalism, and the way the rising cost of borrowing squelches a business’s plans to invest in expansion.
Fed officials lack that kind of experience and viewpoint. They are economists, academics, wonks, and former investment bankers, steeped in data and statistics and economic models, when the economy is composed of people and emotions and hope and risk. Data are unable to capture this entirely, much less model it and predict it.
Yet the Fed folks are making political decisions beyond their ken. In this particular saga, they thought they knew as much as President Trump did. They made it clear within the first six months of his presidency that he understood money, credit, and debt far better than they did, both as an institution and as the Federal Open Market Committee.
All of this is plainly true, but for some reason criticizing the high priests of the Federal Reserve was out of bounds. Traditionally, the relationship between the US central bank and the president of the United States was a respectful and restrained one, in public and on the surface.
They need each other. The president appoints the Federal Reserve chairman to a four-year term, but legally, the chairman doesn’t serve at the pleasure of the president. For once, Donald Trump, the former star of The Apprentice, is unable to invoke his TV catchphrase, “You’re fired!”
The Fed chairman runs an independent entity with 22,000 employees, an annual budget of more than $5 billion, the Federal Reserve System of a dozen regional Federal Reserve Banks, the seven-member Board of Governors, and the twelve-member Federal Open Market Committee, made up of the seven governors and the New York Federal Reserve Bank head, plus four regional bank chiefs.
The Fed has a stranglehold on the two choke points—interest rates and the money supply—that can stall or stoke the economic growth that every president needs for reelection. Established in 1913, the Fed today is guided by two mandates: price stability (i.e., tamping down inflation expectations on the part of consumers, businesses, and the markets) and maximum employment (i.e., a low jobless rate).
These are opposing forces. If interest rates are too high and the money supply is tight, businesses will forgo borrowing to expand and job growth will stall. If job growth spurts up past the Fed’s uninspired expectations, it might spark inflation fears in the economy and, more important, at the Fed itself. That possibility might prompt the Fed to raise rates sooner to blunt the enthusiasm. But if it raises them too much, it kills the party. It is a delicate balance. Donald Trump doesn’t do delicate.
In addition to setting the base rate for other interest rates (choke point number one), the central bank controls the size and flow of the money supply (choke point number two). When the financial markets panic, the Fed floods the system with extra liquidity by buying government and private bonds from Wall Street investment houses. After the Wuhan pandemic, its balance sheet was likely to swell up to $7 trillion or $8 trillion in assets.
When the Fed raises the federal funds rate, it can trigger rate increases most everywhere else in the economy. After six months of increases in the first half of 2018, the rate on a thirty-year fixed-rate mortgage had risen by 0.6 percentage points, from 3.95 percent to 4.54 percent. The Wall Street Journal said that would add $100 to the monthly mortgage payment on an average-priced home. The four hikes the Fed imposed in 2018 would cost households an extra $100 billion in higher mortgage costs annually, the personal finance website MagnifyMoney found.
Fed officials started fretting about the Trump economic agenda even before the transition of power in January 2017. Let other critics dismiss the Trump blueprint of tax cuts and deregulation as fanciful or undoable; it posed one big inflation risk in the view of the Fed: Trump was proclaiming a target of 4 percent annual growth, double what the forecasters at the Fed itself were saying was plausible in the long term.
The Trump campaign’s promises made the Fed officials more fretful that a surprise jump in growth could ignite inflation expectations. That might send the economy into a destructive manic and depressive cycle.
President Obama took office in January 2009 in the midst of the global financial collapse and the Great Recession, which ended at the end of June 2009. The federal funds rate stayed at 0 to 0.25 percent for most of the eight years of his presidency. Growth stayed that slack. The Fed had raised rates only once, at the end of 2015, to 0.5 percent, by the time the 2016 election occurred in November.
The Fed chairman at the time was Janet Yellen, appointed in February 2014 by President Obama. Candidate Trump had already started bashing the Fed in the 2016 campaign. He had made it clear that if he won the election, he would replace her when her term ended in early 2018. That would break a forty-year tradition of reappointing the prior president’s Fed chairman. In May 2016, he had told CNBC, “She is not a Republican. When her time is up, I would most likely replace her because of the fact that I think it would be appropriate.”
In a campaign ad, he labeled Yellen among the “global special interests” who had ruined life for middle America. In September 2016, by then the Republican nominee, he criticized Yellen on CNBC, this time for the Fed’s allowing the US dollar to grow too strongly against foreign currencies. He also said she should be “ashamed of herself” and that central bankers were “very political” for keeping interest rates so low to benefit the Obama administration, “so Obama goes out and let the new guy . . . raise interest rates . . . and watch what happens in the stock market.” Those remarks were on target, and they rankled the pundits and the media.
Two months after Trump gave that interview to CNBC, he won the election. A few weeks later, on December 15, 2016, right before he took office, the Federal Reserve raised interest rates a quarter point, to 0.75 percent. It was the second rate hike in eight years, and Fed chairman Janet Yellen had a full year left in her term.
The new hike came in a year in which GDP growth finished at a listless 1.6 percent for the entire year. It was inexplicable.
Under her watch, the Fed raised rates three more times in a row, in quarter-point increments, up to 1.5 percent by year-end 2017. In late October, a week before he was about to name a new appointee to be chairman of the Federal Reserve, President Trump appeared on my show on Fox Business to discuss the matter.
On air, the president asked me point-blank, “Do you have a preference, out of curiosity? Tell me who your preference is. I would love to hear it. I only want that from people I respect.” He can flatter to a fault. I told him, “I personally believe that Janet Yellen might be worth keeping.”
President Trump responded that she “was very impressive” in their recent meeting in the Oval Office, adding “I like her a lot.” “I mean, it’s somebody that I am thinking about. I would certainly think about it.”
A week later, on November 2, 2017, President Trump nominated “with great pleasure and honor” Jerome Powell as Yellen’s replacement to be chairman of the Fed. He was hoping for a lot more cooperation with—and accommodation by—a chairman of his own choosing. Powell had been serving on the Federal Reserve Board of Governors since 2012.
At a Rose Garden ceremony marking the nomination, President Trump told the media he had picked Powell for the job because “He’s strong, he’s committed, he’s smart.” Powell told reporters that he was “committed to making decisions with objectivity, based on the best available evidence, in the long-standing tradition of monetary policy independence.” If he could have put “independence” into italics, he would have done so.
At the gathering, President Trump went out of his way to thank Janet Yellen, “a wonderful woman who’s done a terrific job. We have been working together for 10 months, and she is absolutely a spectacular person. Janet, thank you very much. We appreciate it.” He said she had served “with dedication and devotion” and that the Fed is “respected all around the world and is crucial to our economic prosperity.”
Whether the president’s praise was gracious or insincere—take your pick—Yellen was unforgiving. In February 2019, she expressed doubt that President Trump understood economic policy or the mission of the Fed: “I doubt that he would even be able to say that the Fed’s goals are maximum employment and price stability,” she told NPR. She expressed concern about his criticism of the Fed and her successor.
In December 2018, a month after President Trump nominated Jerome Powell as Fed chairman, the Senate Committee on Banking, Housing, and Urban Affairs voted 22–1 in favor of sending the nomination to the US Senate for final approval. The sole dissenter was Senator Elizabeth Warren, who had clashed with Powell over regulation in confirmation hearings.
Powell assumed the chairman’s post on February 5, 2018. At the very next meeting of the Federal Reserve Board of Directors, in March, the Fed hiked the interest rate again—and signaled that it would keep hiking rates. GDP growth had finished 2016 at a subpar 1.6 percent, and it had rebounded to 2.4 percent in 2017, despite four fed funds rate hikes in a row that year. That marked a 50 percent faster economic growth rate in just one year.
Now, as 2018 approached, the Fed found the strength of the Trump economy unnerving. The minutes of the Federal Open Market Committee’s March meeting revealed that Fed officials were wary of the tax cuts Congress had passed at the end of 2017. They were uncertain what effects the cuts would have, “partly because there have been few historical examples of expansionary fiscal policy being implemented when the economy was operating at a high level of resource utilization.”
The Fed was nervous that the tax cuts would spur inflation rather than real growth. Forecasts now showed that the Fed expected to raise rates two more times in 2018, and some economists were looking for three. That was rather perplexing to me, as the economy showed zero signs of inflation, the Fed’s number one worry.
The rate hike of March 22, 2018, was particularly ill timed. On the same day, the Trump administration would take another step toward escalating its confrontation with China on trade, releasing its report detailing China’s many unfair trade practices related to technology transfer, intellectual property, and innovation.
Just three weeks earlier, on March 1, President Trump had slapped China by setting a 25 percent tariff on all imports of steel and a 10 percent tariff on all imported aluminum. China accounts for 50 percent of the worldwide steel production and 67 percent of global output of aluminum.
The combination of Powell’s surprising hawkishness and the Trump tariffs roiled financial markets. It was hard to put the two together. Fed officials had warned that a trade fight could be a drag on the economy. That would call for the Fed to step away from raising rates—at least long enough to see if those concerns were valid.
By raising rates a month into the new chairman’s term and signaling more hikes ahead, the Fed risked weakening the US economy just as we were confronting China. It struck many as troubling. The Fed seemed to be raising rates in lockstep without considering the risks to the economy, even as we were launching a trade war.
The Trump administration’s pressure campaign on the Fed began unofficially on April 2, 2018, in an interview on CNBC between anchor Kelly Evans and Peter Navarro, then the director of the White House National Trade Council. Navarro, a deft and seasoned pundit in debates on cable news, was Trump’s most voluble hawk on China, trade, and the Trump tariffs.
On the last question, Evans got arcane: The economy, she said, is great, but why is the yield on the benchmark ten-year Treasury note down a bit today? It had fallen from almost 3 percent to 2.7 percent. Falling ten-year yields can show that investors are worrying about long-term growth. She told Navarro, “Frankly, no one around here can really explain it. What do you think is going on?”
Navarro redirected that into a tacit swipe at the Fed. Evans instantly caught the gravity of what Navarro was saying. She went in for the pin.
NAVARRO: Yeah, I was a little puzzled when the Fed announced three rate hikes before the end of the year, because when I look at the chessboard, I don’t see any inflation to speak of in the economy. And a lot of reasons are things like the president’s tax cuts, which are going to stimulate a lot of investment, productivity, growth, downward pressure on wages, and, remember, the supply side effects of deregulation. . . .
EVANS: Yeah—but does that mean, Peter—which is great. You’re right and that’s the ideal outcome. But final question here, does that mean that there’s no reason to keep hiking interest rates?
NAVARRO: Well, that’s the Federal Reserve job. All I can tell you is I was surprised when I saw that announcement based on my read of the inflation chessboard. I remember in the late ’90s when Alan Greenspan was hurrying to raise interest rates and we had tremendous productivity growth and low inflationary pressures then. So, again, you know, bottom line here is that the market—
EVANS: Is it a mistake? Was it a mistake then? Is it a mistake now?
NAVARRO: I won’t say that. I’m not in—that’s the Federal Reserve chairman’s lane. And we’ve got a good—Kevin Hassett, the Council of Economic Advisers.
EVANS: I think you’re hinting that it’s—hinting at a mistake.
NAVARRO: All I’m saying is to the investors watching CNBC here is that the economy looks very, very strong on all parameters and doesn’t appear to be significant inflationary pressures that would detract from that strength, so it’s all good.
EVANS: All right Peter Navarro. Thank you for your time.
NAVARRO: My pleasure.
Translated from Fed-speak: Yes, Navarro was saying that the Fed made a mistake.
It was mild stuff, but it provoked gasps in the corporate financial media. The end was nigh: a Trump administration official had dared to publicly voice skepticism about the Fed’s monetary policy! Contradictorily, some of the loudest objections to Navarro’s remarks came from the people who had argued the China tariffs would be a drag on the US economy; they should have agreed with Navarro that the Fed had raised rates too high.
For all the waves of disapproval in Fed circles, no one at the Central Bank was intimidated. At its next regular meeting, in June 2018, the Board of Governors voted unanimously to raise the federal funds rate target by another quarter percentage point, to a range of 1.75 percent to 2 percent. Instead of hiking the rate three times in 2018, they were now projecting four increases.
As if to say, “Tweet that, President Trump!”
Eight of the fifteen board members indicated that they expected at least four rate increases in 2018, up from seven votes in March and just four votes in December. Further, most Fed officials said that the rate would go up at least three more times in 2019 and at least once more in 2020. That would drive the rate up to an upper range of 3.5 percent by the end of President Trump’s first term—and strangle any attempt at the 4 percent economic growth he had so publicly promoted.
For the first time in four years, the Fed’s official policy statement omitted language that said officials expected to hold their target rate below the neutral level “for some time.” In other words, the age of easy money and superlow interest rates was coming to an end. Monetary policy accommodation would be over soon.
Dropping those three simple words, “for some time,” was widely perceived as a hawkish move by the Fed—a signal that rates were heading higher. It was not even a question anymore. Now the Fed said only that the “timing and size” of future rate increases would be determined by many factors. They were now inevitable, in any case.
Powell had altered the stance of monetary policy. He also had changed, literally, the stance of the Fed chairman. Ben Bernanke and Janet Yellen had both conducted press conferences seated behind a desk, a pose perhaps inspired by their academic backgrounds and befitting a government official appointed to carry out bureaucratic or clerical duties.
Powell chucked the desk and stood, instead, at a lectern, as a president does when addressing the press. He declared that he would speak straight to the American people in plain English. He announced that, instead of holding press conferences after every second meeting, as Yellen had done, he would hold them after every meeting. He was transforming the role of the Fed chairman from a behind-the-scenes post to one of public leadership.
Powell’s comments at the press conference after the June meeting underscored that notion: “As the economy has strengthened and as we’ve gradually raised interest rates, the question comes into view of, how much longer will you need to be accommodative and how will you know?”
The Fed had already stopped being accommodating. It had just raised rates for the fifth time in less than two years. Powell mentioned that the Fed was being “very careful not to tighten too quickly.” He added, in a message aimed at 1600 Pennsylvania Avenue, “We had a lot of encouragement to go much faster, and I’m really glad we didn’t.”
Translation: But we could do so at any point, so avoid messing with us.
Chairman Powell was making the same mistake I have seen a procession of Fed chairmen make over the decades. When you have a hammer, suddenly everything begins to look like a nail. As soon as they start their new term, they feel compelled to test themselves by raising rates to make their claim on new ground.
Even a sage high priest of Fed black arts made the same error. Alan Greenspan, who served five terms as Fed chairman from August 1987 to January 31, 2006, did so at the start of his tenure. Peter Navarro alluded to it in his interview with Kelly Evans on CNBC. The Greenspan rate hikes helped send the economy into a deep downturn after the market crash on Black Monday, October 19, 1987.
Powell had convinced himself he could read the markets and economic signals, when his background lent itself to other strengths. He had started his career in New York as a lawyer and investment banker, then served Bush 41 as undersecretary of the Treasury, after which he had been a partner for almost a decade at Carlyle Group, a giant private equity fund with $200 billion in assets. His perspective was that of an investment banker. President Trump approached it from the perspective of a builder.
President Trump took Chairman Powell’s higher public profile not so much as a provocation as an invitation. If Powell could speak in plain English from the bully pulpit of his new lectern, surely Trump could publicly address Fed policy.
Powell had recently appeared on Capitol Hill for the semiannual ritual in which the Fed chair testifies before Senate and House panels, where he had been grilled by lawmakers about why wage growth was so low, despite the low level of unemployment. Democrats demanded to know what the Fed would do to accelerate wage growth. There was little concern about inflation or interest rates at the hearing.
None of the senators held back in homage to tradition and Fed independence. Witnessing the spectacle, President Trump must have wondered: Am I the only person in the world who is barred from questioning the Fed’s monetary policy?
This highlights how strange the conventions of Washington had become regarding the Federal Reserve. Senators and congressmen were permitted—even expected—to pepper the Fed chairman with questions and challenges. But the president of the United States was expected to keep his mouth shut, no matter how egregious the mistakes of the central bankers became—even though he lacked the authority to fire the Fed head.
But President Trump was hardly going to keep quiet. The mystery is why anyone had ever thought he would.
The June 2018 increase by the Fed convinced both economists and the markets that it was hell bent on raising rates and shrinking its balance sheet. Michael Gapen, the chief US economist at Barclays Investment Bank, told the Wall Street Journal that Powell’s press conference and the Fed’s statement had implied that the rate-hiking policy was actually on autopilot.
Talk of a looming recession filled the media. Three days after the June hike, the Journal reported that one forecasting model, from BBVA bank in Spain, now predicted that the chance of a recession had more than tripled in six months, from only a 5 percent chance in the next twelve months to a 16 percent chance. It was a big jump.
Counting the first rate hike in December 2016, a month before Trump had taken office, up until that point in June 2018, the Fed had raised the rate six times, starting at 0.5 percent before the first increase and raising to 2.0 percent. That may seem small; in fact, it amounted to more than tripling the underlying cost of borrowing funds. It was a shocking rise, and the Fed overdid it terribly. It would go on to raise the rate two more times, pushing it up to 2.5 percent in the ensuing six months to December 2018.
Frustrated, President Trump in July 2018 started a six-month pressure campaign, criticizing the Fed in the most direct public assault ever launched by any president. In the next six months, he would devote some seventy publicly reported messages aimed at addressing the Fed.
He started on July 19, 2018, in an interview at the White House with CNBC: “I’m not thrilled. . . . I don’t like all of this work that we’re putting into the economy and then I see rates going up.” That was enough to prompt CNBC.com to call it a “stinging and historically rare criticism.” The Journal said that the president’s remarks “break with tradition that presidents refrain from commenting on monetary policy.” Former Dallas Federal Reserve Bank president Richard Fisher warned that the president was overstepping his authority. Former Federal Reserve governor Frederic Mishkin told CNBC that the Trump sniping was “not particularly welcome” and a “danger sign.”
Obama’s Treasury secretary Lawrence Summers told reporters, “Likely result of Presidential intervention is higher rates as Fed needs to assert its independence.”
The next day, President Trump tweeted on the Fed, complaining that China and the European Union were manipulating their currencies and interest rates to reduce them, to our disadvantage. Four weeks later, he made private comments to wealthy donors at a fund-raiser on Long Island, telling them he had expected “Jay” Powell to be a cheap-money Fed chairman and lamenting that he had raised rates, instead.
Ten days later, in an interview in the Oval Office with Bloomberg News, he said, “We are not being accommodated. . . . I don’t like that.” He added, in a moment of diplomacy, “That being said, I’m not sure the currency should be controlled by a politician.” He told the Bloomberg reporters that he didn’t regret appointing Powell.
A month later, on September 26, the Fed raised the federal funds rate again—up another quarter point, to 2.25 percent. President Trump told reporters at a press conference in New York, “Unfortunately they just raised rates a little bit because we are doing so well. I’m not happy about that.”
At an October 10 rally in Pennsylvania, he remarked, “They are so tight. I think the Fed has gone crazy.” Later that day, he said in an on-air call with Fox News that the central bank was “going loco” by raising rates. Six days later, he told Fox Business Network that the Fed is the “biggest threat” to the economy. He added that the central bank was “independent, so I don’t speak to them, but I’m not happy with what he’s doing because it’s going too fast.”
Then, on October 23, the president told the Journal that “maybe” he regretted appointing Powell as Fed chairman, although he added, “I’m not going to fire him.” With disarming transparency, he said he was sending a message to Powell, while acknowledging that the Fed is independent.
With the next Fed meeting on December 19 approaching, President Trump stepped up the pressure campaign, carpet-bombing the issue six times in the next four weeks. He broached the topic on November 20 at a press briefing.
On November 26, he did an interview with the Journal, telling the paper “I think the Fed right now is a much bigger problem than China. I think it’s—I think it’s incorrect, what they’re doing. I don’t like what they’re doing . . . but the Fed is not helping.” A day later, he told the Washington Post that he was “not even a little bit happy with my selection of Jay. . . . I think the Fed is a much bigger problem than China.” He added, “They’re making a mistake because I have a gut, and my gut tells me more sometimes than anybody else’s brain can ever tell me.”
That was followed by an interview with Reuters on December 11, one week before the Fed board was to meet and vote on whether to raise rates again, in which he said, “I think that would be foolish. . . . I need accommodation.” He called Chairman Powell a “good man.” “I think he’s trying to do what he thinks is best. I disagree with him. I think he’s being too aggressive, far too aggressive, actually far too aggressive.”
A week later, the president put up a last, plaintive tweet, saying it was “incredible” that the Fed is “even considering yet another interest rate hike. Take the Victory!”
Two days later, on December 19, the Fed raised rates one more time, up another quarter point to 2.5 percent—five times as high as the rate had been in November 2016 when Trump had been elected. President Trump’s agenda had sparked GDP growth in spite of the Fed’s constant pushback, making this feat all the more impressive.
All that public lobbying had failed to move anyone at the Fed. President Trump was furious. On December 21, Bloomberg reported that President Trump had discussed firing the Fed chairman, which would violate the law, undermine the Fed’s autonomy, and rattle the markets. The Trump administration spent the next few days softening the message. On December 23, Mick Mulvaney, Trump’s pick as his next chief of staff, told reporters he had spoken with Treasury secretary Steven Mnuchin and had learned that the president “now realizes he does not have the ability” to fire Powell.
Then, on Christmas Eve 2018, President Trump tweet-bashed the Fed again:
The only problem our economy has is the Fed. They don’t have a feel for the Market, they don’t understand necessary Trade Wars or Strong Dollars or even Democrat Shutdowns over Borders. The Fed is like a powerful golfer who can’t score because he has no touch—he can’t putt!
Golf trash talking; now the president was getting serious.
On Christmas Day at the White House, reporters asked President Trump about Powell. He answered, “Well, we’ll see. They’re raising interest rates too fast. That’s my opinion. . . . They’re raising interest rates too fast because they think the economy is so good. But I think that they will get it pretty soon.”
The next Fed meeting for a vote on interest rates came on January 30, 2019. For the first time in two years, the Federal Reserve Board of Governors voted to keep interest rates at their current levels. At long last, a pause.
Five days later, on February 4, the president hosted Fed chairman Jerome Powell, the Fed vice chairman, and the Treasury secretary at a casual dinner at the White House. Immediately afterward, the Fed released a statement saying that its representatives hadn’t discussed Powell’s expectations for monetary policy. They hadn’t had to discuss the matter; the president had made his views known.
After months of Fed fury and President Trump’s barrage of persuasion and intimidation, the Fed had finally stopped raising rates. After eight hikes in a row over two years, it stood back. It looked like a victory for President Trump. It wasn’t.
In the next month or two, President Trump would place two calls to Chairman Powell. Though the Fed’s hawkish stance on pushing rates higher seemed to be softening, he would stay on it, keeping up the pressure on the Fed to start cutting rates. Yet the Fed let the rate stand at 2.5 percent and refused to cut it for the next seven months.
That stubborn stance by the Fed whacked the economic growth the Trump administration was endeavoring so mightily to achieve. The brain trust at the central bank was supposed to tap on the brakes of the economy and, instead, had jammed down too hard and sent growth skidding. The numbers show it.
A 2.5 percent federal funds rate for banks’ overnight loans seems small. But it was vastly higher than in Germany and elsewhere, places that were a higher credit risk than the United States and that therefore should have been paying higher interest rates on their government bonds. Instead, the strongest among them, led by Germany, were charging investors a fee to put their money into zero-rate bonds, resulting in “reverse” interest rates.
Another drag on growth, in the president’s view, was that the Fed’s policies were letting the US dollar rise too high against the value of currencies in Japan, China, and Europe. A strong dollar and how much it can buy in goods is an indication of the country’s underlying strength, just as a stock price indicates the same of a company. If the dollar gets too strong, it makes the cost of US exports too high for buyers in other countries; they can get the things cheaper elsewhere in a local currency.
None of that swayed the Fed’s resolute and devout devotion to ensuring the highest possible interest rates without strangling economic activity. Then suddenly the Fed began cutting rates to offset the strangling effects of its own increases. On August 1, 2019, it cut a quarter point to 2.25 percent; just six weeks later, on September 19, another quarter-point cut to 2.0 percent; on October 31, a third cut to 1.75 percent. Three cuts in three months—a clear sign that someone at the Fed had previously erred egregiously.
Without the Fed’s deigning to admit it, it was tacit proof that it had gotten it wrong and raised rates way too high and left them there for far too long. President Trump had been right all along about the Fed’s raising rates too high when it should have been cutting them without fear of inflation—the only reason to push rates up.
Events had overtaken any fury over Trump’s having the temerity to criticize Fed policy. As the Wuhan pandemic began to threaten worldwide commerce in March 2020, the Fed imposed emergency cuts: on March 3 a half-point cut, rather than the usual quarter point, down to 1.25 percent; and then a full point on March 15, down to just 0.25 percent, a crisis level.
Whoever leads the United States after the 2020 election, the prospects for future clashes with the Fed will loom large. The next president will need all the help the Fed can offer, yet the Fed will be looking to tamp down the comeback at the first sign of giddiness, and only the Fed gets to decide when that is.
Economists find this acceptable. Before Trump assumed office, an economist for the Japanese securities firm Nomura told the New York Times that the real effect of the Trump agenda, if it stokes economic growth, will be to prompt the Fed to raise rates to tamp down the new growth before it even gets under way. He explained, “If we have a big stimulus, the logical thing for the Fed to do is to raise rates faster. There isn’t a whole heck of a lot of scope to just let the economy run under those circumstances. There’s a question about whether fiscal stimulus under Trump just leads to higher interest rates.”
So even though the American people elected Donald Trump, it was really up to the unelected Federal Reserve Board of Governors to decree whether his policies would be permitted to push the accelerator on growth. President Trump’s target of 4 percent growth, twice what the experts said was possible, was beside the point. The Fed was inclined to overrule the people, and there was nothing anyone could do about it.
This is perverse. This is a national problem. The Fed answers to no one, really. It certainly doesn’t answer to the president; otherwise it would have stopped hiking rates much earlier. It isn’t elected, duly or otherwise, by the American people, yet it holds the power to deny economic success to a newly elected president.
There was no telling how the Federal Reserve would proceed as the rebuilding of the United States began. For President Trump, one concern had to be: What if these guys blow it again? For decades the Fed has been autonomous and off-limits to protect it from political interference. Yet the central bank is removed from the people whose lives can be made significantly better—or worse—as a result of its good and bad calls.
The Fed’s two mandates are disconnected from the things that help Americans thrive economically and build better lives. The Fed is obsessed with muzzling inflation expectations, which requires suppressing growth. It must maximize jobs, which requires better growth. It wants a strong dollar, which hurts US imports—and impedes GDP growth. The Fed is risk averse and more intent on avoiding wild swings than delivering an economic rebound that could help millions of Americans find better-paying work. Workers and business owners, by contrast, want vibrant growth, strong wages, loose credit, and easy borrowing. These are contradictory agendas.
When the Fed makes a terrible call, as it did in the first two years of the Trump administration, it answers to no one. President Trump answers to the American people. The disconnect should be addressed, to strengthen the Fed’s accountability to the people it is supposed to serve. I doubt that any of the people at the Federal Reserve feel their purpose is to serve the people. They serve the banks and trading partners and global elites.
Trump’s views were right, and they went largely ignored by the corporate media and even by economists who knew he was correct. It was easier to dismiss and depict Trump’s tweets as Fed bashing than to engage seriously on the economic analysis beneath it. It was the same old pattern: assume Trump was shooting from the hip, and criticize him for his impulsiveness without taking a deeper look at what he had said and what he hoped to accomplish.
In the Trump Century, for the president to restrain his comments and avoid pointing out the Fed’s flawed path would disserve the American people—attention must be paid, something had to be said. Who else better to say it?
After all that fracas and back-and-forth, and in the aftershocks of the Wuhan pandemic, the Fed would cut the interest rate to zero. It looks likely to stay there for several years, as the United States rebuilds from the months-long shutdown of commerce and regular life. It was the worst possible way to get there, but it will help whoever is elected president rebuild the US economy better and smarter and bigger than ever before.