Understanding Gen Z: A Comprehensive Look at America’s Youngest Adults. Download
Report: Understanding Gen Z. Download
President Donald Trump may have won the interest rates battle, but ultimately lost the war against Federal Reserve Chairman Jerome Powell. Since last October, Trump had demanded that the Fed reduce rates in order to stimulate the economy and the stock market. To get his way, Trump called the Fed’s refusal to tango “too aggressive,” “ridiculous,” and “loco.”
As a result of Trump’s win, the Federal Reserve Board is likely to reduce the discount rate by a quarter point in its June 18-19 meeting, but if not then, certainly by its July 30-31 meeting. This is because of Trump’s continued demands and because of some of the recessionary effects of tariffs.
Additional rate reductions would likely follow later this year, as new hiring sank to 75,000 in May from 224,000 in April, and the effects of the tariff war against China continue to mount.
Discount rate reductions lower the cost of consumer and business borrowings. This is said to stimulate consumer and business demand for goods and services, thus growing the economy and employment.
Not this time. But it is time to rethink the Fed.
Lower rates won’t spur higher growth and employment. Rather, they would hardly thwart some of the $400 billion recessionary effects of the trade wars. And they won’t automatically reverse the longer-term negative effects of increasing uncertainty from the tariff wars on economic growth.
To win lower rates, Trump deepened and widened the trade wars, forcing consumers to pay more, manufacturers to sell less and stock investors to lose. This leaves no reasonable choice for the Fed but to lower the discount rate.
Forcing the Fed to lower interest rates in this manner not only impinges on the Fed’s independence, but also turns it into a tactical tool in the hands of the Executive Branch.
This was bound to happen. In politics as in business, tactical maneuvers have been replacing strategic action. Furthermore, politics has been becoming increasingly salient, which has motivated presidents to have more impact on day-to-day life.
Get the latest news, data and insights on key trends affecting Wall Street & financial policy.
Presidents Obama and Trump were no longer satisfied with Fed candidates — as well as Supreme Court candidates — who only shared their general philosophies. They wanted clear, contractual understanding on tactics, too: how would a candidate vote on different issues, from interest rates to employment, and from health care to abortion rights, in the case of the Supreme Court. Think of the unsuccessful Fed candidates Stephen Moore and Herman Cain, who both called for the rate reduction the president had wanted.
It would be unwise to leave this trend unattended, because it would support the expansion of the Executive Branch’s power and do away with the Fed’s long-term monetary policy goals in favor of short-term political considerations.
It’s time to consider options facing the Fed:
Surprisingly, several aspects of the compromise option have been part of what the Fed has been doing. Examples include regular inputs from the Fed’s 12 districts comprising the Beige Book, an increasing number of presentations by Board members to garner the support of the Fed, a news conference following some of the Board’s regularly scheduled meetings, as well as a role in consumer protection, community development and income inequality. Apparently this is no longer sufficient.
A more formal discussion of the full scope, structures and procedures of the Fed may be warranted and could be productive. This is because the U.S. is the biggest economy in the world and its interest rates directly affect the global economy.
The alternative is the present practice of slow and painful jawboning of the Fed until it heeds to the wishes of a few, be they the president, industry or investors.
Avraham Shama is the former dean of the College of Business at the University of Texas, The Pan-American. He is a professor emeritus at the Anderson School of Management at the University of New Mexico, and his book about stagflation, “Marketing in a Slow-growth Economy,” was published by Praeger Publishing.
Morning Consult welcomes op-ed submissions on policy, politics and business strategy in our coverage areas. Updated submission guidelines can be found here.