The Fed Takes Its Lumps from Donald Trump

He hits hard:

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?

2 Replies to “The Fed Takes Its Lumps from Donald Trump”

  1. Wait, is there any direct evidence of Obama meddling with the Fed inappropriately? Violating its political independence? (Unlike Tea Party calls for controlling “audits.”) Because if not, then this is another Trump conspiracy theory to undermine the legitimacy of a key institution.

    In addition to wanting to keep debt payments low, the Fed has a dual mandate for both inflation and unemployment. Given that unemployment especially by labor force participation is below target and inflation is also below target, zero interest rates are well within the (liberal to centrist) mainstream. Janet Yellen has been a dove for ages, and she’s well within the dove playbook. Obama knew this when he appointed her but that’s not inappropriate collusion. No more than if a Supreme Court nominee shares the judicial philosophy of the President who appointed him or her. More important, ZIRP and QE were both started by a Republican appointee, dealing with a Congress that promoted austerity, which has been discredited.

    Agreed that credit spreads are too tight for much more Fed impact. We need to do some big structural stuff like a big infrastructure upgrade, lower business taxes, education fixes, etc.

    1. Direct evidence of this kind of “meddling” would be hard to find; that would call into question the independence of the institution. I think that Yellen would like to raise interest rates but she has gotten pushback from Obama to do so, for reasons stated.

      As I tried to explain, this really not a partisan issue. Whoever of the two ends up winning this contest will have to face the simple fact that we have passed the point of no return on the national debt, keeping interest rates around zero only pushes the day of reckoning down the road.

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