Trump and interest rates

There seems to be no norm or conventional wisdom that President Trump is not willing to overturn. Following Fed Chairman Powell’s congressional testimony Tuesday in which he confirmed the Fed’s intention to continue its gradual increase in its policy interest rate, Trump said: “I don’t like all of this work that we’re putting into the economy and then I see rates going up.”  The statement is wrong on multiple accounts.

The economy is now fully employed and interest rates probably should have been returned to normal some time ago.  The alarming current and projected fiscal deficits of the federal government will force interest rates and trade deficits still higher.  This is Trump’s fault– not Powell’s.  “Who pays uncle Sam’s deficits?”  The major policies threatening to undermine the economic boost from tax and regulatory reforms are Trump’s trade policies (pulling out of the Trans Pacific Partnership, stalling and threatening U.S. withdrawal from NAFTA, Steel and Aluminum tariffs (taxes) on our friends in Canada, Mexico and the EU, and a deepening trade war with China).  Leaving the TPP  Resisting the interest rate increases needed to keep inflation at 2% would increase the most regressive tax around (inflation).

But Presidential interference in implementing monetary policy, as is now being undertaken by President Erdoğan in Turkey, violates a long established principle and practice of central bank independence.  Historically, inflation, which falls heaviest on the poor and undermines economic efficiency and growth, has resulted primarily from governments turning to their central banks for financing in misguided and ultimately futile efforts to keep interest rates (government borrowing costs) low.

President Trump can save the economic benefits of his tax and regulatory reforms by rejoining the TPP, rapidly concluding amendments to NAFTA that improve productive efficiency and fairness, dropping the steel and aluminum tariffs, ending the trade war with China, joining with the EU, Canada, Japan and others to bring China into compliance with the rules of a strengthened WTO, and establishing a fiscal budget surplus primarily through entitlement reform.

Author: Warren Coats

I specialize in advising central banks on monetary policy and the development of the capacity to formulate and implement monetary policy.  I joined the International Monetary Fund in 1975 from which I retired in 2003 as Assistant Director of the Monetary and Financial Systems Department. While at the IMF I led or participated in missions to the central banks of over twenty countries (including Afghanistan, Bosnia, Croatia, Egypt, Iraq, Israel, Kazakhstan, Kenya, Kosovo, Kyrgystan, Moldova, Serbia, Turkey, West Bank and Gaza Strip, and Zimbabwe) and was seconded as a visiting economist to the Board of Governors of the Federal Reserve System (1979-80), and to the World Bank's World Development Report team in 1989.  After retirement from the IMF I was a member of the Board of the Cayman Islands Monetary Authority from 2003-10 and of the editorial board of the Cayman Financial Review from 2010-2017.  Prior to joining the IMF I was Assistant Prof of Economics at UVa from 1970-75.  I am currently a fellow of Johns Hopkins Krieger School of Arts and Sciences, Institute for Applied Economics, Global Health, and the Study of Business Enterprise.  In March 2019 Central Banking Journal awarded me for my “Outstanding Contribution for Capacity Building.”  My recent books are One Currency for Bosnia: Creating the Central Bank of Bosnia and Herzegovina; My Travels in the Former Soviet Union; My Travels to Afghanistan; My Travels to Jerusalem; and My Travels to Baghdad. I have a BA in Economics from the UC Berkeley and a PhD in Economics from the University of Chicago. My dissertation committee was chaired by Milton Friedman and included Robert J. Gordon.

3 thoughts on “Trump and interest rates”

  1. Is there a model that indicates the relative impulse from tax cuts for growth, compared with the relative drag from a “targeted tariff” that does not affect the domestic micro-markets?
    Smoot-Hawley was overall, against all imports, and against all importers. Trump is picking out industries, and while those are severely impacted, will the “macro drag” from the target-tariffs offset most of the impulse from the tax cuts? I am hoping for a situation in which the tariffs only slice off a percentage point of expansion, without driving it down to “Obama levels.”
    Trump is playing a game (with our lives and economy) but he apparently “deals” with his power to impose them, as in the case of ZTE.
    I think Lighthizer is the one responsible for preventing appointment of new WTO appeals arbitrators, although Wilbur Ross is a protectionist in the old school (e.g. steel). Lighthizer opposed the WTO accession act Congress passed in 1995, and forced negotiator Carla Hills to eliminate any review of “antidumping” by WTO. I was working with Congressmen to persuade them he and his labor union allies were simply wrong about “rules based arbitration” in world trade.

    Trump is just misled by his “collectivist way of thinking”:
    trade is not between “nations” but is an activity at the micro level of individual choices for suppliers and overseas customers. The “trade deficit” is a fallacy of composition, compounded by an arbitrary statistical classification that counts services differently; and ignores the value of direct foreign investment and foreign demand for “Dollars” – latter of which is good for US interest rates.

    1. Note: my comment about micro-markets, suggesting they are not affected by tariffs, I meant to include the adverb ‘comprehensively.’ The secondary effects of higher supplier prices can spread out, as ripples in a pond. But not every operating company is in the ripple range. Smoot-Hawley made wild ripples all over the pond.

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