Trump vs. the Fed

President Donald Trump has spent months berating the Federal Reserve for tightening the credit supply too much and too soon. His claim is that the "great" economy that the U.S. has right now, which he takes full credit for, would be doing even better if the Fed hadn't mistakenly reined it in.

With almost no inflation, our Country is needlessly being forced to pay a MUCH higher interest rate than other countries only because of a very misguided Federal Reserve. In addition, Quantitative Tightening is continuing, making it harder for our Country to compete. As good…..

— Donald J. Trump (@realDonaldTrump) July 22, 2019

….as we have done, it could have been soooo much better. Interest rate costs should have been much lower, & GDP & our Country’s wealth accumulation much higher. Such a waste of time & money. Also, very unfair that other countries manipulate their currencies and pump money in!

— Donald J. Trump (@realDonaldTrump) July 22, 2019

The graph below shows the personal savings rate in the United States since Trump has taken office from February 1, 2017 to June 1, 2019.

Given a savings rate of 8.1% as of June 1, 2019, it's very likely that the interest rate should actually be much higher than the current rate set by the Federal Open Market Committee, especially after they recently lowered the rate in early August. On the free market, interest rates would be tied to general consumption versus general savings. The bigger the pool of savings the lower interest rates would be, whereas a lower amount of savings would cause interest rates to rise. These signals help keep consumption and savings in check naturally, whereas the FOMC setting rates artificially sends the wrong signal to investors and distorts the economy.

So Trump's claim that interest rates, given relatively low price inflation, should be much lower is not in line with economic reality. While we can't know exactly what interest rates would be on a free market at any given moment, we can look at the market signals as they exist and say that the rates currently set by the Fed are too low and that any calls for them to be even lower would just further distort the economy and create an even larger bubble that will inevitably cause an even worse recession.

On Monday, President Trump continued his Twitter attacks on the Fed and Fed Chairman Jerome Powell, giving us some possible insight into why he wants lower rates and quantitative easing from the Fed.

Our Economy is very strong, despite the horrendous lack of vision by Jay Powell and the Fed, but the Democrats are trying to “will” the Economy to be bad for purposes of the 2020 Election. Very Selfish! Our dollar is so strong that it is sadly hurting other parts of the world…

— Donald J. Trump (@realDonaldTrump) August 19, 2019

…..The Fed Rate, over a fairly short period of time, should be reduced by at least 100 basis points, with perhaps some quantitative easing as well. If that happened, our Economy would be even better, and the World Economy would be greatly and quickly enhanced-good for everyone!

— Donald J. Trump (@realDonaldTrump) August 19, 2019

Judging from these tweets, Trump is starting to be concerned about a possible economic downturn going into his 2020 reelection bid, which is a justified concern given that we've already established that interest rates have already been too low for too long and given his trade war with China that he recently had to back off on given concerns that it was starting to harm the economy.

Jeffrey Tucker of the American Institute for Economic Research was entirely correct on August 2 when he wrote:

Financial markets dropped in sadness when Donald Trump tweeted that he would impose an additional tax of 10% against an additional $300 billion in products shipped from China to the U.S. And of course he presented it as a tax that China would pay, which is completely untrue. American buyers pay that tax. China sellers suffers too; same as you would if a thief stood in the grocery aisle demanding ten cents on the dollar of everything you buy.

But once again, he proclaimed this whole thing as great for America despite all the data showing that business investment is down, manufacturing is down, uncertainty is up, imports are devastated, and exports flat. As Max Gulker has demonstrated, the numbers confirm precisely what the theory would predict: this nonsense is not working.

The data contributed to the Fed’s decision once again to lower rates in hopes of avoiding a more severe downturn. Whether by intention or in effect – does it even matter? – the Fed is being called upon to paper over the policy errors of this administration.

Trump wants his trade war with China to help certain politically powerful factions in the U.S. and wants the Federal Reserve to artificially lower interest rates in the meantime to help offset the harm caused to everyone else by the trade war ahead of the 2020 election. That artificially low interest rates will harm everyone much more later on is irrelevant to Trump, if he considers it at all, since it is unlikely that the bubble will burst prior to November 2020. Since his policies are destined to harm the economy, Trump is opting for the illusion of a strong economy to run his campaign on in the hopes that it won't come crashing down until he's safely re-elected if not completely out of office so that he can blame it on someone else.

Unfortunately, it looks like, according to Robert Wenzel of Economic Policy Journal, Fed Chairman Powell will do exactly what Trump wants him to do at the next FOMC meeting in September.

Indeed, based on the expectations of Fed funds futures traders, it is a 100% given Powell will buckle and cut the rate at the Sept. meeting, with a 95% expectation it will be a 25 basis point cut and a 5% expectation it will be a 50 basis point cut...

So we will likely be stuck with the worst of both worlds as Trump pushes us further into a trade war and closer towards another recession all so he can keep his grip on power.