The recent attacks on the US Federal Reserve by President Donald Trump need to stop immediately. His criticism — not to mention his generally snide commentary — undermines the traditional role of an independent central bank that can objectively manage economic issues, such as inflation. It also shows a failure to understand the tools that central banks should have at their disposal and the dangerous impact of low-interest rates.
Yet Trump has called the Fed his “biggest threat” because it is “raising interest rates too fast”. He also blamed Fed chief Jerome Powell, whom he appointed in February, for “his loco decision” to raise rates by 25 basis points in September.
This helps no one. First, Trump is wrong in calling the Fed his biggest threat, a statement that people understand as Trump thinking the Fed is hampering his ability to grow the US economy. The US economy is already doing well, and unemployment is at a historic low, facts that Trump clearly knows, judging by his tweets. This means that inflation will return.
The president is currently treating inflation as some kind of legendary creature that science can’t confirm. That is unrealistic. While the current inflation rate is only 2 per cent, large increases that have come on suddenly are historically common. A booming economy, such as in 2005 to 2006, saw inflation rates of between 4 and 5 per cent, which forced the Fed to respond.
Some economists have agreed with the president that the current rate of increases may be too fast, but almost no one agrees that the current rate of between 2 and 2.25 per cent is too low. In 2000, the rate was almost 7 per cent; in 1989 the rate was 10 per cent; in the early 80s the rate varied between 15 and 20 per cent.
The figures all represent a peak rate for their times, but in each situation those rates were imposed to control inflation.
But the idea that some companies might now struggle to grow if rates rise above 2 per cent is itself a damning indicator of their financial strength. Many economists are critical of the effect of prolonged low interest rates, as companies that have used the cheap money policies to leverage their expansion are unprepared for a tightening, competitive market. And lest we forget, low interest rates cause bubbles, which ultimately led to the financial crisis that followed the sub-prime crisis.
Trump needs to sit down, log out of Twitter, and let the Fed do its job. The days of cheap money lending need to end, now. Trump should be happy to have the luxury to complain about the Fed’s effect on a booming economy.