To Wall Street denizens, it’s alarming to hear President Trump say Federal Reserve policy is “crazy,” “loco,” and “going wild.”
But Trump isn’t trying to dictate Fed policy. He may even feel the Fed is doing the right thing. What Trump wants is a villain he can blame for negative turns in the economy, thereby exempting himself.
Trump blasted the Fed after an ugly day in the stock market on Oct. 10, basically arguing that the Fed’s policy of raising interest rates is harming the economy. “They are raising interest rates and it’s ridiculous,” Trump told Fox News. “There is no reason for them to do it and I’m not happy about it.”
Hardly anybody who pays attention to monetary policy agrees with Trump. The Fed has been gradually raising interest rates, which remain unusually low, to head off inflation and return to levels more in line with historical norms. Presidents usually leave the Fed alone, since political interference with monetary policy can be disastrous, as it was when Richard Nixon manipulated Fed policy in the early 1970s. Nixon wanted the Fed to stimulate the economy prior to the 1972 election, which it did, at his behest—but the badly timed stimulus ended up worsening inflation and contributing to other problems that took a decade to clear up.
Finding a villain
Fed watchers now worry that Trump is trying to strong-arm the Fed into reversing its policy of gradually raising interest rates, after a decade of radically easy monetary policy. But Trump is probably thinking of something else completely: lining up a convenient villain he can point to if and when markets turn negative and the economy slumps. It fits perfectly with Trump’s modus operandi.
Trump, for instance, has been relentlessly bashing the Robert Mueller investigation into Russian interference in the 2016 election. Mueller, so far, has had precisely nothing to say about Trump himself. So there’s been no need at all for Trump to defend himself against Mueller, up till now. But by repeatedly calling the probe a “witch hunt,” Trump is preparing for the eventuality that Mueller will some day impugn him. Trump is trying to preemptively invalidate the probe, in the mind of the public, by the time it actually touches him.
Trump, in fact, is something of an expert on scapegoating. He blames immigrants and China for the falling living standards of working-class Americans. He blames companies such as Harley-Davidson and Amazon for rational responses to his own harmful economic policies. And of course he blames Democrats for illegal immigration and many other national problems.
A ready-made bogeyman
Blaming the Fed for a market selloff, however, is a new level of scapegoating, even for Trump. Without a doubt, economic advisers such as Larry Kudlow are telling Trump that he’d wreck business and investor confidence if it actually seemed like Fed chief Jerome Powell changed Fed policy to accommodate Trump. What the Fed is doing now is normal, even if it follows an extraordinary period of easing. The Fed, among other things, needs to push rates back toward typical levels so it has room to cut rates when needed to soften the impact of the next downturn, whenever it comes.
Trump may also be nervous that other policies of his—such as tax cuts that may have come at the wrong time and his escalating trade war with China—could cause or contribute to a downturn. Some economists think the tax cuts will cause overheating, which could push up inflation. Trump’s tariffs on imports could also contribute to inflation. And higher-than-expected inflation is one thing that ends business cycle expansions and torpedoes bull markets.
By fingering the Fed as the culprit, Trump deflects attention from his own policies, which might be the real cause of the problem. Trump also knows the Federal Reserve is one of those elitist, globalist institutions some of his supporters are deeply suspicious of, if only because they don’t understand it. To him, the Fed is a ready-made bogeyman he can blame for whatever economic pain he wants to excuse.
Trump might get away with his Fed-bashing, if he bad-mouths the Fed without actually leaning on the central bank to change policy. He or his aides may even be signaling to Chairman Powell behind the scenes that everything’s fine, just keep doing what you’re doing, and ignore the verbiage from the boss. But the moment Trump’s Fed-bashing looks like it might actually distort Fed policy, he’ll have a far worse problem on his hands, and only himself to blame.
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Rick Newman is the author of four books, including “Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman