There is a certain amusement to watching Donald Trump shouting at the Federal Reserve over interest rate rises. Less amusement about the Dow falling 800 points but still. For the rate rises are the result of the tax policies that Trump has pushed through.
Do note, I think the tax policies are just fine, beneficial. But the rate rises are still the result of them:
President Donald Trump has renewed criticism of the US central bank, blaming “crazy” interest rate rises this year for prompting steep stock market falls.
The president took aim at the Federal Reserve, led by Jerome Powell whom he personally chose to lead the bank, after the Dow Jones Industrial Average fell 3%, or more than 800 points, in Wednesday trading – its worst drop in eight months.
The interest rate rises aren’t crazy, they’re predictable:
‘I think Fed has gone crazy’: Trump blasts Federal Reserve for its rate hikes and says the market is in a ‘correction’ as Dow Jones plunges 800 points and tech stocks tumble
Dow Jones Industrial average fell 831 points, or 3.1 percent, on Wednesday
We may or may not think this is desirable but it’s not something we should be surprised by – the rate rises that is. The insight comes from Scott Sumner:
We have two sets of tools by which we can direct the economy in general, two types of macroeconomic policy. There is fiscal policy, which is taxes and spending, the balance between them. There’s also monetary policy, interest rates and a number of more minor associated matters. Either or both can be used to direct that economy as whole. No, this isn’t the start to a beginner’s economics textbook, just take that as being true. It’s the basic outline of absolutely every model that any government, central bank or part of academia uses. It is true in this world even if it’s not in theory.
The thing is though, according to a theory currently best associated with the economist Scott Sumner, in a world with an independent central bank, we don’t actually have that fiscal policy that we can use.
For, we have an expansionary fiscal policy by cutting taxes – even cutting the right taxes in the right way – without cutting spending. So, the central bank now puts up interest rates a little more, a little faster, than they would have done in the absence of the fiscal stimulus. For the central bank is the balancing item here and they’re going to set their bit of policy to where they think it does indeed balance with the economic conditions.
That is, Trump’s tax cuts have boosted the economy. Yay! At which point the Fed raises rates because of the boosted economy. Which is what Trump is complaining about, the inevitable reaction to his own policies.
This mixture of politics and economics is fun, isn’t it? For there is no way out of this while we have an independent central bank.
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Trump shouting at the Fed is like Trump shouting at anything else: Not entirely factual, crowd-pleasing, and entertaining provided you don't take it literally.
Trump's law cutting corporate tax rates from 35% to 21% does not blow a huge hole in the deficit. Behaviors are changing, and the tax cut is sucking money formerly stashed all over the world and spraying it in all directions. A mandated "living wage" would be moot, were there not labor unions that ached to win some fight. Kudlow thought the tax cut would "pay for itself" in 3 years, but there are signs that it is coming close to doing so in the current year. Steve Moore wrote recently that the always-myopic Congressional Budget Office is scoring the tax cut a loser by looking at the expanded economy (which we would not have had without the tax cut) and decrying the government's foregone slice of it.
Now: As with Reagan, no one is serious about cutting spending; and given this, you are either going to monetize debt or you aren't. This means realistic interest rates or wrecking the dollar. The former is better, as it finally rewards saving and forces borrowers to consider the costs of their capital.
Yes, it is silly for Trump to caterwaul about this. But it's also as meaningless as when Trump bellows that we should crack down on the press, or that he wants lower oil prices. When we get squeezed by price changes, even sensible ones, we want our President to say these things.
It is also silly for the stock market to be doing what it's doing, as the Fed has announced its schedule for rate increases for two years (since before we knew the tax cut would pass). What has changed in the last two days? The IMF lowering its global growth forecast from 3.9% to 3.7% (though it faults the tariff war which, if it were really curtailing global commerce, we could and would discard in a moment). Also a changed view of next month's US elections, though movement seems to be in the direction of Trump NOT losing one or both houses (and them seeing that he bought their survival, and becoming a little less anti-Trump) and this should be good for markets. So I am baffled.
Hmmmm....would have thought an independent central bank is the lesser of the evils.
There are more than two options. An independent bank regulator would be better than an agency purporting to be a national central bank. At the least, the entity that instigates inflation would not be the same one that profits from it.
Hmmmm....would have thought an independent central bank is the lesser of the evils.