Janet Yellen: ‘I Doubt Trump Even Knows’ What The Fed Does

I’m doing deals, and I’m not being accommodated by the Fed. They’re making a mistake because I have a gut, and my gut tells me more sometimes than anybody else’s brain can ever tell me.

— Donald Trump, November, 2018

That classic quote, delivered late last year during a characteristically absurd interview with the Washington Post, neatly encapsulates the president’s take on US monetary policy.

Simply put, his take on the Fed is the same as his take on everything else: his instincts are always right and anybody whose opinion differs from what his instincts are telling him is by definition mistaken.

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Trump’s Infallible ‘Gut’ Is ‘Not Even A Little Bit Happy’ With ‘Jay’ Powell, Ok?!

One critical thing to note about that approach is that it might be some semblance of tenable if i) Trump was intelligent, and/or ii) Trump’s instincts were informed by an overriding desire to pursue policies that he believes are in the best interests of the public.

Unfortunately, neither of those two things are the case. Trump isn’t intelligent (a state of affairs that’s exacerbated by an aversion to facts and learning) and his instincts always point him in the direction of decisions that in some way, shape or form benefit his bank account, his family or his ego and, ideally, all three. Sometimes, that works to the benefit of other people, but when that happens, it’s by accident.

Of course the amusing thing about Trump is that because he lacks foresight and doesn’t know the meaning of the word “introspection”, his “gut” sometimes leads him to make snap decisions that undermine his longer-term goals. In some cases, those snap decisions are at odds with things he’s previously said or done.

The quintessential example of that dynamic was his ill-advised decision not to re-appoint Janet Yellen, despite having said repeatedly while on the campaign trail in 2016, that she was “doing political things” with interest rates in order to bolster the Obama administration’s economic record and buoy the stock market. In other words: Trump, by his own account, knew full well that Yellen was a market-friendly, easy money gal, which is exactly what he wanted and needed.

Unable to suffer the prospect of reappointing an Obama-era Fed chair (and a woman, at that), 2017 Trump ignored 2016 Trump and installed Jerome Powell, despite virtually everyone on the planet knowing that Powell would likely prove to be less accommodative than his predecessor. Additionally, Trump should have known (and was doubtlessly warned) that his fiscal policies were almost guaranteed to prompt a more hawkish lean from the Fed given worries about the prospect of the Phillips curve snapping back to life to “exact its revenge” (to quote Powell himself).

But Trump had to put his stamp on the Fed and by July of last year, it had become abundantly clear that that stamp was working to the detriment of his trade war, as Fed hikes widened the monetary policy divergence between the US and America’s trade partners, bolstering the dollar and watering down the effects of the tariffs. Fast forward to October and Trump’s Fed chair made a grievous communications error which, combined with the administration’s decision to move ahead with tariffs on $200 billion in Chinese goods, deep-sixed market sentiment. Not to put too fine a point on it, but Janet Yellen would have never said “long way from neutral” at a delicate juncture.

And so, Trump embarked on a multi-month smear campaign against his own Fed appointee, in a desperate attempt to compel a dovish policy lean. That backfired, prompting the Fed to stick to a hawkish stance in the interest of protecting its independence. By the end of December, Trump was reportedly on the verge of trying to fire Powell. That too backfired, as the prospect of the Fed ceding control of US monetary policy to the White House caused markets to vomit.

The entire soap opera underscored Trump’s shortsightedness and demonstrated, beyond a shadow of a doubt, that those who insisted a US president (even one as unhinged as Trump) would never dare go full-Erdogan (as it were) on the central bank had underestimated this president’s autocratic tendencies.

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Do Not Underestimate Donald Trump When It Comes To The Fed

It also demonstrated that Trump doesn’t have the faintest clue about how US monetary policy works, beyond the extent to which loose policy can serve to juice the economy and stocks.

Well, in what might very fairly be described as her most pointed criticism of Trump to date, Janet Yellen told Marketplace’s Kai Ryssdal that the president probably can’t even tell you what the central bank’s mandate is. Her comments came during an interview conducted at her office in Brookings.

We’re just going to excerpt the relevant portions from the transcript (which you can read in full here) because you really need to read her comments just as they were apparently delivered to appreciate how fantastically blunt her assessment is.

As Trump would say, “Enjoy!”

Ryssdal: You mentioned the trustworthiness of the Fed and its track record, which gets me to the American public having confidence in the Federal Reserve. You and Chair Bernanke and Chairman Greenspan and everybody at the Fed works really hard on that. I have to ask you, then, about some of the remarks by the president of the United States about Chair Powell and what the Federal Reserve is doing and, in his mind, the impact that it’s having.

Yellen: Well, I don’t think it’s had a tremendous impact yet, and it would distress me if I thought it were having a significant impact. I think the economy is doing well. The Fed is very close to having satisfied its maximum employment and price stability mandates and you can see that most people feel good about the economy and the Fed.

But it would concern me – President Trump’s comments about Chair Powell and about the Fed do concern me, because if that becomes concerted, I think it does have the impact, especially if conditions in the U.S. for any reason were to deteriorate, it could undermine confidence in the Fed. And I think that that would be a bad thing.

Ryssdal: Do you think the president has a grasp of macroeconomic policy?

Yellen: No, I do not.

Ryssdal: Tell me more.

Yellen: Well, I doubt that he would even be able to say that the Fed’s goals are maximum employment and price stability, which is the goals that Congress have assigned to the Fed. He’s made comments about the Fed having an exchange rate objective in order to support his trade plans, or possibly targeting the U.S. balance of trade. And, you know, I think comments like that shows a lack of understanding of the impact of the Fed on the economy, and appropriate policy goals.

Ryssdal: More broadly, then, his understanding of the effect of his trade tariffs and his withdrawal from, say, the Trans-Pacific Partnership.

Yellen: Well, I think that’s creating a lot of uncertainty for businesses, and I think my own view is that those shifts are likely to be adverse for the U.S. economy, to the extent that some of these things are bargaining chips, with the hope of lowering trade barriers generally. I suppose the outcome of that, if it’s successful, could be positive …

Ryssdal: It’s a big “if.”

Yellen: It is as a big “if.” And when I continually hear focus by the president and some of his advisers on remedying bilateral trade deficits with other trade partners, I think almost any economist would tell you that there’s no real meaning to bilateral trade deficits, and it’s not an appropriate objective of policy.

Ryssdal: And the president, of course, China specifically, focuses on that quite a bit.

Yellen: He has focused on that quite a bit, especially with respect to China.

Ryssdal: This is kind of a shot-in-the-dark question, but what would it take for you to pick up the phone and call Kevin Hassett at the Council of Economic Advisers? Or Larry Kudlow at the National Economic Council, and say “Hey, Lar?”

Yellen: Well, that’s something that I have not done since leaving the administration. I had regular contact with the Council of Economic Advisers and the NEC, as well as Treasury, while I was at the Fed, and I’m sure that Chair Powell and others continue to do so. I haven’t picked up the phone.