Friday, July 20, 2018

What did Donald Trump do today?

He tried to mess with the Federal Reserve.

Yesterday, Trump broke a presidential taboo by demanding that the Federal Reserve not raise interest rates. Presidents usually try not to interfere with the Fed, for two reasons: they can't actually make the Fed do anything, and trying to usually backfires, either on the president or the economy

Comments like those tend to spook markets, which are supported in part by the fact that the United States' central bank is (normally) insulated from politics. Accordingly, the White House rushed out an unsigned statement Thursday night, insisting that Trump had not said what he said. It read in part, "Of course the President respects the independence of the Fed. As he said he considers the Federal Reserve Board Chair Jerome Powell a very good man and that he is not interfering with Fed policy decisions."

Whether or not Trump was told that his staff had walked back his statements, he repeated them in force again this morning. This pattern--saying something, being forced to retract it, and then immediately saying it again--is a common Trump behavior pattern that has been especially intense this week

Complicating matters is that Trump's usual economic illiteracy is on display. The reason the Fed is raising interest rates is not to "penalize" the American economy, but so that it will have a tool at the ready during the next economic slowdown. (The Fed can't lower interest rates below zero, so it raises them during times of growth to have room to work with.) 

Normally, Congress could help ease the next downturn by lowering taxes, providing a short-term economic stimulus to revive a fading economy. But Trump's 2017 tax cuts, which will add almost $1 trillion dollars to the deficit this year alone--pouring lots of cash into the economy when it least needs it--have made any further cuts functionally impossible. 

Why does this matter?

  • Presidents can't do much to directly grow the economy, but they can easily damage it if they're careless or stupid.