President Donald Trump’s preferred monetary policy is simple. Is the economy sluggish? Cut interest rates. Is it heating up? Also cut interest rates. Now there’s a new addendum: If his handpicked Federal Reserve chair won’t play ball, hold the economy hostage.
At least, that’s what Trump threatened on Friday on Truth Social. He wrote that if the Fed doesn’t “get smart” and lower rates, he will halt trade entirely with any country that maintains a trade deficit with the United States. That would include China, Mexico, Canada, Vietnam, South Korea and dozens of others — in short, many of America’s top trade partners.
If Trump thinks elevated interest rates slow the economy, wait until he sees what cutting off trade would do.
Assuming Fed Chair Kevin Warsh is as much of an inflation hawk as he says he is, he’ll resist the pressure. The Fed has no good reason to cut rates right now. As Warsh himself warned last week, inflation remains stubbornly above the Fed’s 2 percent target. It’s nearly double, in fact, sitting at 3.7 percent, according to the Fed’s preferred metric. Even excluding food and energy prices, which are more affected by events such as the Iran conflict, prices are up 3.3 percent from a year ago.
Given Friday’s strong job numbers, Warsh leaving the door open for a rate hike is especially prudent. The U.S. economy added 162,000 jobs in August across a variety of sectors, beating economists’ forecasts by nearly 100,000 jobs. Unemployment remained at 4.1 percent — lower than it was in any month between February 1970 and September 1999.
With the labor market on solid footing, goosing the economy before the midterms is a surefire way to make inflation worse. It’s telling that not all of the White House is fully on board with the pressure campaign against the Fed. National Economic Council Director Kevin Hassett said he thinks the argument for holding rates steady is “pretty strong.”
Hassett also clarified: “The Fed will do what it wants to do. We respect their independence.” It’s good that Hassett does, but it seems like “we” doesn’t include his boss.
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