President Donald Trump said he expected Jerome Powell to be a cheap-money Fed chairman and lamented to wealthy Republican donors at a Hamptons fundraiser on Friday that his nominee instead had raised interest rates, according to people present. This is his most direct criticism yet of the federal reserve. Past presidents have refrained from commenting on fed policy respecting the banks independence. Trump is changing this dynamic and it could spell trouble ahead.
The federal reserve is an independent agency:
The federal reserve was setup to be an independent government agency that focuses on monetary policy to “stabilize” the economy through various cycles. Although the chairman of the fed is appointed by the president, there is a board of governors from the various federal reserve banks around the country that help set the policy. Presidents historically have shied away from trying to unduly influence the federal reserve as the intent of the fed is to help “smooth out” the economic cycles.
Trump changes the game:
Trump, with his statements, is trying to “bully” the federal reserve into an easier money policy. Essentially Trump wants the fed to hold off on future rate increases so that the lower rates continue to drive economic growth.
The downside:
The federal reserve will likely react the opposite of what the president wants. It is similar to the president poking a bear. The bear ultimately will get ticked off and react. In this case Trump’s criticism will further the federal reserve’s resolve to continue to raise rates. It could also encourage them to raise rates higher than originally intended to prove a point that they are an independent agency and not influenced by the president.
This criticism is creating a dangerous economic situation. If you look at the numbers, wage gains remain tepid and inflation is not coming “roaring back” as anticipated. Now would be a good time to take a break from the rate increases to wait for the data to back up any claims of future inflation. The president’s critique will force the fed to continue raising rates now to show its independence as opposed to waiting for more data before raising rates
Rates will rise:
As the federal reserve continues tightening, interest rates will also rise on mortgages and other variable debt (credit cards, auto loans, etc..). This interest rate increase will begin to slow the economy down and could ultimately lead us into the next recession.
Fed will overshoot
The biggest risk from the “spat” with the president is that the fed will overshoot and raise interest rates too quickly which will lead to a “hard landing”, aka recession, for the economy. I think this is a likely scenario as the federal reserve continues its rate tightening policy even as the economy does not appear to be overheating from inflation. This will likely drive us into the next economic cycle sooner rather than later.
As we all hopefully learned in elementary school, many times it is best to be quiet. Maybe the president should follow this advice to help ensure the fed focuses on the economy as opposed to proving its independence.
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, Illinois, and Florida. They are recognized in the industry as the leader in hard money lending with no upfront fees or any other games. Learn more about Hard Money Lending through our free Hard Money Guide. To get started on a loan all they need is their simple one page application (no upfront fees or other games).