Trump wants Fed to cut already low rates, but that could harm seniors

Gordon L. Weil

Donald Trump’s strongest political case for re-election is the success of the American economy.  It’s also a big risk, and he knows it.

That’s why he lambasts the Federal Reserve for not lowering interest rates.  He believes that lower rates will stimulate more growth, keeping the historic Obama-Trump recovery going.

His demands for lower interest rates and his frontal attacks on Jerome Powell, his own choice as Fed chair, have created an open war between the president and the independent Fed.

Short-term political demands can conflict with the Fed’s role to protect the economy long-term.  That’s what seems to be what’s happening now.

The recovery from the Great Recession has been long but not especially strong.  The benefits have not been the same for all Americans.

Republicans blocked President Obama’s effort for a second economic push, leaving the Fed to handle the recovery.  It cut interest rates and made money available for borrowers, successfully stimulating economic activity.

The GOP tax cut and Trump’s cutback on environmental regulation have helped sustain the recovery.  But its long life, the president’s strongest political argument, carries considerable risk.  Trump needs it to last even longer, through to the November 2020 election.

He has long believed in low interest rates, partly because of his experience as a borrower for real estate investments.  He argues that growth would have been higher if interest rates had been cut, and they should be slashed now to juice up higher growth.

Trump openly believes that the Fed should follow his policies.  Yet, like other central banks in free market economies that manage major world currencies, the Fed is supposed to operate independently of the politics of the day.  That’s one reason its members’ terms are 14 years, well beyond even two presidential terms.

Central banks take a long view of their role in promoting a stable currency and economic conditions that will increase employment.  The Fed, now composed primarily of Republican economists, has done that consistently since the Great Recession of 2008.

By cutting interest rates, it made investment and home buying easier.  As the recovery continued, it gradually began increasing rates, though they still remain well below the rates of the past 60 years.

Taking care that its small steps would not harm the recovery, the Fed began increasing rates so that it would have a tool – its ability to again cut rates – if there were signs of a recession.  Trump ignores that longer range concern and focuses on his desire for higher growth now.

If there is any reason the Fed might cut rates, it is the uncertainty created by the president’s trade moves that unsettle world markets.  Wobbles elsewhere could spread to the U.S.

Trying to impose his will on the Fed, Trump has openly sought ways to dump Powell.  He would like the powers of the near-dictator Turkish president, who just fired his central bank chief.  And he envies the Chinese ruler’s day-to-day economic control.  He ignores the need to protect the stability of the dollar, the standard world currency.

Two recent picks to fill Fed vacancies were obviously unqualified and were dropped.  One of the next two named openly displays her vast ignorance of monetary policy.

Unqualified nominees who do not support the Fed’s independence are unlikely to be confirmed by the Senate, though it is under GOP control.  Republican resistance is similar to its unwillingness to eliminate the requirement for 60 votes to end debate on most bills, though Trump demands it.

The Republicans recognize that the Senate majority will almost inevitably shift one day to the Democrats.  They are likely to continue to protect Fed independence and require more than a simple majority.  It’s not that they oppose Trump.  But they worry about what the Democrats would do.

Beyond these policy concerns, there’s a practical reason to worry about unnecessary rate cuts.  When the Fed lowers interest rates, payouts are reduced on bonds, the fixed investments on which many retirees depend, whether its obvious to them or not.  The interest rate paid on bank savings also falls.

Maine has the highest median age in the U.S.  Lowering interest rates can cut retiree income.  Because the effects of any national economic policy are not evenly distributed, lower interest rates could harm older Mainers and not be offset by a small increase in national economic growth.

With its broad, long-term focus, the Fed can take such facts into account.  Trump’s focus on how to force the Fed to help him win in 2020 doesn’t do that.

Gordon L. Weil

About Gordon L. Weil

Gordon L. Weil formerly wrote for the Washington Post and other newspapers, served on the U.S. Senate and EU staffs, headed Maine state agencies and was a Harpswell selectman.