“Just run the presses – print money.”
That’s what President Donald Trump supposedly instructed his former chief economic adviser Gary Cohn to do in response to the budget deficit. The quote appears in Bob Woodward’s controversial book Fear: Trump in the White House.
Trump disputes many of the anecdotes Woodward assembled. But regardless of whether the President used those exact words, they do reflect an “easy money” philosophy that he has expressed many times before.
Trump Likes Low Rates, Loose Money
President Trump has described himself as a “low interest rate person.”
This past summer, Trump launched a very public attack on the Federal Reserve’s rate hiking campaign. He wants it to stop because it’s making the dollar “too strong” and threatening to undercut his tax cut fiscal stimulus.
There’s only so much dollar strength the U.S. economy and U.S. debt and equity markets can take. President Trump is keenly aware of the risks.
A Fed rate hike next week is a given at this point.
The Trump-versus-Fed feud will likely heat up again in December if the central bank raises its benchmark short-term rate at its scheduled policy meeting. Although a December hike is far from certain, Fed chair Jay Powell and company seem intent on raising interest rates again – and possibly a couple more times in 2019 if the markets don’t melt down before then.
Additional tightening will increasingly put the central bank on the wrong side of the President’s Twitter feed. If Donald J. Trump wants to put more than social media pressure on Fed officials, he can threaten to remove them.
Trump himself appointed Powell, a decision he now apparently regrets. It would be unprecedented for a president to fire a Fed chairman before his term is up... but not necessarily inconceivable. After all, President Trump has done a number of unprecedented things, as the anti-Trump media are wont to remind us.
Does the White House have the legal authority to remove Fed Board members? Apparently so. According to Section 10 of the Federal Reserve Act. “each [Board] member shall hold office for a term of fourteen years from the expiration of the term of his predecessor, unless sooner removed for cause by the President.”
If the President finds “cause,” then he can remove Fed policymakers. Such a backdoor power play would set off a political firestorm if Trump actually did it. But if he merely implied that he’s thinking about it, that might be enough to get some Fed officials to back down on another rate hike.
Trump Could Strike Back by Auditing the Fed
Another way Trump could strike back at the Fed is by reintroducing calls to audit the Federal Reserve’s books, as often urged by former Congressman Ron Paul. Trump had made “Audit the Fed” a part of his campaign platform in 2016. But since being sworn into office, he has neglected to push it.
Fed chair Jay Powell opposes an audit for obvious reasons. He opposes greater transparency to the public because that would threaten the Fed’s “independence.” That’s really just a code word for secrecy and having no accountability.
In reality, the Fed has never operated independent of political and banking interests. It has just kept its activities and entanglements invisible to public scrutiny.
The way the anti-Trump media portray it, Trump is “breaking with longstanding tradition by trying to influence monetary policy decisions.” In reality, he’s just being more open and explicit about what is traditionally done through backroom deals.
Many Presidents Have Pressured the Fed
Most presidents have exerted pressure on the Fed privately through various means.
Lyndon Johnson reportedly went so far as to physically push Federal Reserve Chairman William McChesney Martin against a wall to try to intimidate him into backing off on interest rate increases. And Alan Greenspan notoriously entered into a “gentleman’s agreement” on policy objectives with the Clinton administration to ensure he would get re-appointed as Fed chairman.
The only way to take politics out of monetary policy is to take away the power of a small handful of central planners at the Federal Reserve to determine interest rates. If the free market were left to determine borrowing costs, then no amount of lobbying by banks or strong-arming by politicians would make a difference.
For now, though, all eyes are on the Fed as the single most powerful economic decision-making body in the world. It remains under public pressure from the White House to loosen monetary policy. That will happen eventually, but it may come only come after the Fed goes one hike too far and triggers a financial crisis.