In August of 2019, former NY Federal Reserve President Bill Dudley launched an attack on President Trump.
The attack came in the form of an opinion piece in Bloomberg.
In it, he argued that Trump’s trade war with China threatened to crash the U.S. economy.
So Dudley wrote that the Fed should consider punishing Trump for his bad policies.
Here’s an excerpt from that 2019 Bloomberg editorial by Dudley (via Zerohedge):
U.S. President Donald Trump’s trade war with China keeps undermining the confidence of businesses and consumers, worsening the economic outlook. This manufactured disaster-in-the-making presents the Federal Reserve with a dilemma: Should it mitigate the damage by providing offsetting stimulus, or refuse to play along?
…Yet the Fed could go much further. Officials could state explicitly that the central bank won’t bail out an administration that keeps making bad choices on trade policy…
Such a harder line could benefit the Fed and the economy in three ways. First, it would discourage further escalation of the trade war, by increasing the costs to the Trump administration…
Central bank officials face a choice: enable the Trump administration to continue down a disastrous path of trade war escalation, or send a clear signal that if the administration does so, the president, not the Fed, will bear the risks — including the risk of losing the next election.
Why did a former NY Fed President feel like the Fed had the right to interfere with the President’s trade policies? It was a strange incident.
Ever since, Trump has rightly assumed that at least some members of the Federal Reserve have it out for him.
The Fed cut interest rates in 2024 at a time which could have been perceived to boost the Democrats’ re-election chances. But ever since Trump’s election they have put rate cuts on hold. Despite the fact that U.S. federal debt interest costs are soaring higher by the day.
47 Strikes Back
Now Trump is putting pressure on the Fed to cut rates. He has given Fed Chair Powell a Native American-style name, Too Late, as in “too late” to cut. Cuts too late would also have been a nice option.
And Trump just became the first U.S. President to remove a Federal Reserve governor for cause. President Trump just gave Lisa Cook the old “You’re Fired” routine, as our friend Sean Ring chronicled in detail this week. Cook has been accused of falsifying mortgage documents, after she listed two houses as her primary residence (whether this was by accident or on purpose remains unclear).
After firing Cook, Trump quickly nominated close ally Stephen Miran to replace her. Cook’s former seat expires in 2038, which would give Miran a long time to influence the direction of the country’s monetary policy.
Trump wants lower rates, and quickly. He feels like the Fed is intentionally obstructing him, possibly because of his aggressive trade policies.
Now, I don’t agree with everything Trump is doing on trade. But that doesn’t mean the Fed should interfere by attempting to undermine POTUS with tighter-than-necessary monetary policy. It’s up to the President, and Congress in some cases, to decide our country’s trade policies.
The Fed was never meant to control international trade, and the fact that it has appeared to interfere in Trump’s decision-making is disturbing.
Now the Fed appears to be reaping the whirlwind of its own actions. Even though Bill Dudley wasn’t officially part of the Fed when he wrote that 2019 editorial, he may as well have been. Powell has echoed similar sentiments, and clearly has beef with Trump’s trade policies.
Does Powell’s decision to hold rates at elevated levels have to do with Trump’s trade policies? Perhaps. We’ll likely never know for sure.
But it’s increasingly clear that Trump is determined to push the Fed to lower interest rates. And I suspect he’ll get what he wants.
After all, if we don’t cut soon, we’ll soon enter a debt spiral as interest costs compound and soar higher. This will happen almost no matter what we do. But lower rates will slow the snowball down a bit.
Of course, there will be negatives to lower rates. Savers won’t get the yield they deserve, inflation could see a resurgence, and the natural equilibrium of the market will once again be disturbed. But we’re used to that by now.
As we pointed out in The Fed Brews Up a Nasty Potion, there are no good policy choices here. Only bad vs horrible ones. Lower rates are likely the lesser of two evils. And they’re definitely the path of least resistance.
So in all likelihood, that’s the direction we’re headed. Trump’s actions will speed us up on the path to lower rates. He’ll fire Powell and other reluctant Fed members if necessary, or drag them along kicking and screaming.
Either way, the fed funds rate is heading lower.
