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.