The only person who spends more time than Fed officials thinking about US monetary policy is Donald Trump. He also spends just about as much time talking about rates as policymakers themselves during any given week.
Is that appropriate? Why, no. Of course it’s not. Or at least not from this president. But that’s the world we live in now. As Pimco’s Joachim Fels wrote earlier this month, “the heyday of central bank independence now lies behind us”.
That contention is supported not only by egregious examples of policymaker bullying by Trump and his autocratic idol in Turkey, but also by recent events in India and, crucially, by the reality of monetary policy operating at the limits.
With rates just barely off the lower bound at best, and still mired in NIRP at worst, and with balance sheets still bloated, the capacity for independent monetary policy to support economies during the next downturn is limited. Indeed, even if you think it’s possible for central banks to cut rates deep into negative territory and buy more assets under existing QE programs, there’s still limited ammo left. That is, even the most dovish of policymakers likely know that rates can only be pushed so deep into negative territory and balance sheets expanded so far.
This is part of the reason why modern monetary theory (MMT) is ascendant. Post-crisis monetary policy has clearly created gross distortions across markets, has undoubtedly increased inequality and done much more to boost financial asset prices than it has to engineer positive outcomes in the real economy. That latter bit is kind of the point if you’re a progressive – monetary policy needs to play a role, but one that’s more bottom-up than top-down. The question, in short, is what would happen if you paired ultra-accommodative monetary policy with fiscal initiatives designed specifically to help Main Street.
The fact that inflation is nowhere to be found even as unemployment continues to bump along at a five-decade nadir argues for just those kinds of experiments – or at least according to some it does.
Some like Stephanie Kelton, economic advisor to Bernie Sanders and MMT torchbearer.
“Greater coordination between fiscal and monetary authorities is almost certainly the wave of the future”, she told Bloomberg Thursday, in an interview in Tokyo. Kelton says that central banks won’t admit to having lost their independence, but the bottom line is that “you’re going to see central banks responding in more accommodative, coordinating ways”.
Read more on the link between central banks at the limits and MMT
The irony, then, is that Donald Trump, Bernie Sanders and Alexandria Ocasio-Cortez are to a certain extent on the same page when it comes to whether the Fed should directly assist the government in stimulating the economy. Of course, there are differences between the president and his liberal rivals in terms of what kinds of stimulus are desirable, but even there, there are overlaps (e.g., infrastructure projects and a desire for more job creation even as unemployment continues to fall below NAIRU).
Although it often gets lost in the shuffle, all of the above is critical when it comes to understanding Trump’s Fed attacks in context. It’s by no means clear that Trump is apprised of the extent to which he’s effectively championing MMT, but if you’re a believer in modern monetary theory, the president’s Fed attacks, however uncouth, dangerous and dictatorial, are not, in fact, wholly misguided.
On Friday, Trump dove into the discussion around the John Williams debacle. On Thursday, Williams gave a speech that essentially echoed academic research showing that when policy is operating close to the lower bound, cutting rates aggressively right out of the gate is preferable to a gradual approach. That stoked bets that the Fed is actively considering a 50bp rate cut at the July meeting. Later, Williams tried to walk it back by claiming his comments were nothing more than an “academic” exercise, but market participants were understandably perturbed.
“The New York Fed may wave away Williams’s comments this week as a simple academic exercise, but try using that excuse when you incur losses from buying expensive assets at stupid prices thanks to misguided central-bank policies”, Bloomberg’s Cameron Crise wrote Friday, adding the following amusing color:
For NY Fed president Williams to talk about the need to ease early and hard in the event of a downturn — and with the Fed about to embark on an easing campaign in less than two weeks — was about as clear as policy signals get. It’s no wonder that the market- implied probability of a 50 basis-point cut this month jumped by 30% after the comments hit the tape. For the institution to then turn around and wave away the remarks as an academic exercise was as astonishing as it was inappropriate. Anyone who bought August Fed funds futures on those headlines and then stopped out at a loss is invited to file an expense claim with Liberty Street, though I doubt it will be honored.
Weighing in on Friday, Trump didn’t even try to hide how closely he’s monitoring the situation. “I like New York Fed President John Williams’s first statement much better than his second. His first statement is 100% correct in that the Fed ‘raised’ far too fast and too early”, Trump said.
The president continued, insisting that the Fed “must stop with the crazy quantitative tightening”. Note that Trump is now issuing orders, just like Erdogan. He then skipped straight to criticism:
We are in a World competition, & winning big but it is no thanks to the Federal Reserve. Had they not acted so fast and “so much,” we would be doing even better than we are doing right now. This is our chance to build unparalleled wealth and success for the U.S., GROWTH, which would greatly reduce % debt. Don’t blow it!
The idea that the president won’t demote Powell if the Fed somehow does “blow it”, is an increasingly out-of-touch position to take. A year ago, it was plausible to suggest that Trump wouldn’t dare strip Powell of the chairmanship no matter what happens. Fast forward 12 months and it is abundantly clear that Trump can and would orchestrate a shakeup at the central bank “by hook or by crook” (to quote SocGen’s Albert Edwards) if the White House doesn’t get what it wants. As Pimco’s Fels would probably say, “deal with it”. Because that is the new reality.
And, again, it’s not clear that politicized central banks would be an entirely nefarious development as long as the leaders to whom they are beholden are some semblance of sane and avoid the kind of public berating that serves to make explicit what’s better left implicit.
Monetary policymakers need to retain some shred of plausible deniability, even if nobody believes it. Trump’s rhetoric, like Erdogan’s, makes that impossible.
“[Central banks’] language will be that somehow everything that they do is their choice, and justified by their read of economic conditions”, Kelton told Bloomberg, in the same interview mentioned above. “But at the end of the day, they’re going to be accommodating fiscal policy”.