Ms Yellen last Wednesday dismissed as emphatically wrong Donald Trump’s claims that she and her institution were keeping short-term interest rates low at the behest of the Obama administration. “Partisan politics play no role in our decisions,” she declared.
Mr Trump is throwing punches at a time when the US central bank is under assault from both sides of the partisan divide, and at a time when polling suggests public confidence in its leadership has declined during a subpar economic recovery.
There’s no question that the Fed is keeping interest rates low at Barack Obama’s request. There’s also no question that the “zero” interest rate regime we’ve had for a long time has created distortions. To characterise the Fed’s policies as “partisan,” however, is a stretch.
Why? Barack Obama knows that, if rates start going up, it won’t be long before the twenty trillion-dollar debt (a figure kicked around last night) will become difficult if not impossible to service. Not only will that put the feds in the hurts, the consequences to the financial system of stressing out the Federal government will be enormous. Thus the Fed keeps interest rates in the cellar.
Barack Obama has the nerve to bully the Federal Reserve, just like he uses the power of the government to bully other institutions and people. The serious questions are these: will either Trump or Clinton do the same when it’s their turn to cut the checks? And how long can the Fed keep this interest rate regime up before something else blows up?