Why President Trump has the Fed on the ropes

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As President Trump last week relentlessly assaulted the Federal Reserve, analysts pondered each tweet.

Does the president not know that the Fed ended quantitative tightening? Might he want an inverted yield curve? What might one infer about exchange rates?

The short answer to each of these questions is that Trump isn’t tweeting about monetary or even exchange-rate policy — he’s tweeting about himself.

A decade in which post-crisis monetary policy made America still less equal gives him a vulnerable target. And he’s taking full advantage of it.

Trump isn’t the first sitting president to lambaste the Fed, but he’s likely to be the first to profit thereby. Former President Lyndon Johnson pushed Fed Chairman William McChesney Martin up against a wall; President Richard Nixon fired Fed Chairman Arthur Burns in 1978; and President George H.W. Bush blamed Fed Chairman Alan Greenspan for his 1992 loss.

In each case, the president wanted more accommodation and the Fed stood by Martin’s interpretation of its mandate: to take away the punch bowl.

Now, however, the Fed has not only kept the punch bowl on the table, but also spiked it with the July rate cut and decision to restart quantitative easing. Trump still isn’t satisfied because he doesn’t care what rates are or how big the Fed’s portfolio may be. Trump cares about who voters think is to blame for slower growth and market turmoil, and he is determined to be sure they aren’t pinned on him.

Making it still easier for a president facing a lot of economic risks, the Fed is extremely vulnerable because its own actions have alienated all but the most elite Americans. Trump has an innate instinct for the jugular and the Fed’s throat is on full display.

The central bank’s political legitimacy has always been tenuous and never more so than now. Populists and progressives now agree that the Fed protects Wall Street at the expense of Main Street.

One might think the Fed’s rate cut satisfied both sides of the spectrum, but it only made each still angrier. Populists side with Trump and progressives believe the rate cut is a move to stabilize markets, not improve equitable macroeconomic growth.

Trump is on to something because the Fed’s post-crisis policy has given his politics the upper hand. For all its vaunted independence, Fed policy has played a major role in making the U.S. still less equal, and even faster since 2010.

One reason Trump won the White House is that many voters believed only radical economic policy could reverse their slide down the income and wealth ladders.

Former Fed chairs can write all the letters they want about the need for central-bank independence. Unless or until the Fed comes up with equality-enhancing policy, concessions to the president will only strengthen Trump’s hand and make the Fed’s independence still more fragile.

Editor's note: This article originally appeared, in slightly different form, in an email to Federal Financial Analytics’ clients.

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Monetary policy Compliance Interest rates Interest rate risk Donald Trump Federal Reserve FOMC