Trump and the Federal Reserve: ‘Redneck’ Monetary Policy
‘Redneck’ is a slang American term for “a working-class person, especially a politically reactionary one, from a rural area.” It has nothing to do with race.
Most people think that this is this kind of person who supports US President Donald Trump, but that’s actually not true: exit polls from the last election show that Trump supporters are relatively affluent. What’s more shocking is the fact that nearly half have college degrees.
Some say that Trump supporters are just people who think like rednecks, allowing popular mythology to replace logic. They are the same kind of people who used to go around calling everyone “Communists” because they cared about social welfare. Trump would have thrived even more in that time, with his ‘get what we want’ mantra.
Trump’s most recent pronouncement on the Federal Reserve was pure ‘redneck’, and it resonated with the Good Ol’ Boys, but also with a lot of people who should be educated enough to know better. “We don’t have a Fed that knows what it’s doing,” Trump informed us on July 5, 2019, in a chat with reporters at the White House. “If we had a Fed that would lower interest rates, we would be like a rocket ship.”
This plays nicely on commonplace stereotypes: ‘America is filled with energy, and only held back by a bunch of evil regulators,’ so the popular mythology has it. It is amazing that regulators should be judged by values, and not by concrete results.
Ironically, the man Trump blames for all this, Federal Reserve Chairman Jerome Powell, was appointed by Trump himself. Powell has stood up to Trump on numerous occasions. But now Trump is talking about “demoting” Powell, a move to take control of the central bank that even Republican senators aren’t willing to accept. It’s also hard to point the finger at an “evil regulator” when you gave him the job, but we all know that logic is irrelevant…
Pump it up, harder, harder
Given that the US economy isn’t doing too badly, what is the real reason Trump is raving about interest rates?
Well, the 2020 election isn’t far off, and Trump would like to pump a lot of easy money into the economy to please voters. Of course, there isn’t a great deal of room to pump into, because interest rates aren’t particularly high. In fact, they are way below what interest rates have been in most of the recent past.
Trump has very little real political capital to spend, as laureate economist Paul Krugman writes: “Trump’s current rage at the Fed should be understood mainly as an expression of frustration over the failure of his 2017 tax cut… The tax cut was a political bust: Trump isn’t getting much credit for good economic numbers, and a plurality of the white working-class voters, on whom the tweeter in chief depends, believe (correctly) that his policies mainly benefit people richer than themselves.”
Why won’t the Fed reduce interest rates?
At its last meeting on June 19, the Fed kept the benchmark fed funds rate steady between 2.25 per cent and 2.5 per cent.
The Fed’s announcement noted that the US economy is expanding at a “moderate pace,” but that there were a number of uncertainties looming – Trump’s trade war is the biggest one – and that US inflation is still too low.
The Fed noted that the trade war has hurt “American manufacturers, farmers and exporters,” but not so much China, its intended target.
Economists noted that the Fed does not just set interest rates, it reacts to market forces. The most recent report on job creation in the US was robust, with 224,000 jobs added in the month of June. This supported the Fed’s decision to leave rates alone.
What is bothering economists is the uncertainty about what course the Fed will take. Because the Fed is giving no clear signal about what it is likely to do in the future, businesses are holding back on investment, and capital that might have flowed into the country is also dammed up for the time being.
“The Fed has been playing a game of chicken with us,” one economist complained.
Would interest rate cuts do any good?
Given that rates are already very low, serious economists don’t believe that cutting interest rates would have much effect anyway.
“I don’t think rate cuts will actually help much,” says Megan Greene, an economist with the Harvard Kennedy School of Government. “There is not a credit supply problem. It’s a credit demand problem. The cost of borrowing is hardly a constraint. Nobody is reporting problems getting credit.” Greene said that cutting rates might boost stocks, but just for a quick hit.
So Trump might not even get what he wants with a rate cut. “He doesn’t have any real ideology,” Greene commented.
Or as Krugman puts it: “The common principle is simple: Monetary policy should be whatever serves Donald Trump’s interests. Nothing else matters.”