Tuesday, 11 Dec 2018

Does Trump understand one thing about the Fed?

On November 27, 2018, Washington Post Representative Philip Rucker and Josh Dawsey introduce President Trump to the White House Oval Office. (Jabin Botsford / The Washington Post)

The Federal Reserve is on track to raise its interest rate target in December, fulfilling its duty to slow down an overheated economy. In doing so, he aroused the wrath of the president.

Federal Reserve Chairman Jerome H. Powell's remarks to the New York Economic Club on Wednesday appear to have softened the central bank's position somewhat, slowing the pace of gains, but the Fed remains determined to raise its interest rates.

And President Trump still seems to consider it unfair that the Fed is threatening to slow down its pace. The central bank has raised its interest rate target six times since Trump took office. The president seems to find the Fed intervention particularly boring, since the central bank boosted growth under President Barack Obama by keeping credit cheap with interest rates close to zero.

Interest rate target of the Federal Reserve

The Fed has also injected billions of dollars into the economy via an asset purchase program called quantitative easing. In recent years, the Fed has begun to withdraw these trillions of dollars from the economy at a rate close to $ 50 billion a month.

"I do not follow the same rules as Obama," Trump told reporters to Post, Philip Rucker and Josh Dawsey on Tuesday. "Obama had no interest in worrying; we pay interest, a lot of interest. It was not paying – we are talking about $ 50 billion of times, paying back and weakening cash. "

Assets on the balance sheet of the Federal Reserve

The timeline is a little more complicated than the president describes. Interest rate cuts and quantitative easing began during the second term of President George W. Bush. The Fed has begun the turnaround that is the subject of Trump's complaints – raising rates and releasing assets – during Obama's second term.

Trump plays fast and with details, but he asks a legitimate question: is it time to raise rates? It's an investigative trail that aligns it with economists who might not seem to be its natural allies.

Why is the Fed raising rates?

The Fed is moving on a fine line. He must store ammunition to fight the next recession without causing the same recession. Officials want higher interest rates and a streamlined balance sheet during a downturn. They want to avoid price fluctuations, the repercussions of which could provoke such a slowdown by keeping inflation close to the target rate of 2%.

The broadest version of the Fed's preferred inflation measure has been equal to or above the target rate of 2% since March. And the economy has seen annualized growth of 4.2% and 3.5% in the last two quarters, well above its long-term average.

The US unemployment rate reached 3.7% in September. This is well below estimates of where unemployment can take place without causing rapid price growth. According to economic theory, as unemployed workers become scarce, employers are forced to raise wages to be competitive. As a result, workers have more to spend and prices rise.

Unemployment rate

At their meeting in late September, most members of the Fed's Open Market Committee predicted rates would be 2.8 to 3.0% over the long term. Most FOMC members think that the target will be even higher in two or three years.

Projections imply that the target rate, currently between 2.0 and 2.25%, should be raised at least two and probably three more times.

Some economists agree with Trump

Some prominent economists, including several who served in the Obama administration, seem to agree with some elements of Trump's argument. They say the Fed should act slowly because the economy is not as good as it seems, especially for disadvantaged groups.

The Fed raises its rates to prevent the economy from overheating. But what if it's not as hot as we think? Underlying inflation, which excludes the food and volatile energy categories, has been close to the 2% target in recent months. Adam Shapiro, an economist at the Federal Reserve in San Francisco, wrote Monday that the rise in prices was probably due to "idiosyncratic factors" rather than "global economic conditions." increased fees for financial services such as ATMs and credit cards.

Annual inflation rate

Harvard economist, Jason Furman, chairman of the Obama Council of Economic Advisers to the White House, has also downplayed concerns about rising inflation. Furman argued in the Wall Street Journal that the Fed should delay rate hikes, especially given recent economic warning signs.

"Surprisingly low inflation" despite a tight labor market is "the main reason for caution," Furman writes, noting that price growth seems much slower considering basic inflation over a shorter period of time. . Inflation should resume, he said, "there would be little inconvenience to wait a few months on the part of the Fed", especially because of the global storm, the decline in S & S. P 500, rising interest rates and appreciation of the dollar.

Jared Bernstein, who was the chief economist of Vice President Joe Biden and who is now a member of the Center on Budgetary and Policy Priorities, said the Fed should worry more about the consequences of the situation. a drop in demand with a rise in rates rather than the possibility of a rise in inflation. a little above the Fed's target.

Bernstein pointed out that a soaring rise in inflation could, on average, help offset the slow price growth that has slowed much of the recovery.

"Two percent is not a ceiling; 2% is an average, "said Bernstein. "And all these downward failures mean that there should be periods of upward mistakes."

Bernstein also argued in the Washington Post that it would be unfair to slow growth at a time when the recovery would affect some of the most disadvantaged workers in the country. Blue collar and less educated workers, minorities and workers with physical and mental disabilities are finally starting to take advantage of a tight labor market.


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