View from the Beltway

Will Meet Wile E. Coyote?

By Owen Ullmann

Rubin’s Rule meets Trump tweets.

resident Donald J. Trump has For Trump, the Fed’s policy observed during a policy shown no compunction about course is looking increasingly perilous discussion in June, just weeks before the attacking independent insti- in 2020, when he would be up for re- government reported that GDP rose 4.1 tutions. Targets of his Twitter election. Today, he is benefitting from percent in the second quarter, the fast- rage include Congress, the a Goldilocks economy that is about as est growth since 2014. “And then in PFBI, the Justice Department, the intelli- good as it can get. Growth is moderate, 2020, Wile E. Coyote is going to go off gence community, the Federal judiciary, unemployment is extraordinarily low, the cliff,” he said, referring to the Road and the news media. and inflation is tame. Runner’s nemesis in the cartoon series. So it was hardly a surprise when That virtuous cycle is unlikely to As predicted, Trump seized the op- he took on one of the most powerful in- last much longer, according to most eco- portunity to bash the Fed when asked dependent agencies in the U.S. govern- nomic forecasts. The Fed is likely to ac- in an interview with CNBC about in- ment on July 20: the . In terest rate policy. He began by praising doing so, he broke with a twenty-five- Ben Bernanke: Chairman Jerome “Jay” Powell, whom year-old rule observed by Democratic Trump appointed to succeed Janet and Republican presidents alike to avoid “In 2020, Wile E. Coyote Yellen, as “a very good man.” Then he public comments about Fed policy. And is going to go blasted the Fed’s rate increases. “I’m for good measure, Trump tweeted his not thrilled because we go up and every displeasure with the Fed in case it didn’t off the cliff.” time you go up, they want to raise rates get the message. Senior Fed officials celerate the pace of its hikes to offset the again … I’m not happy about it.” He have been bracing for quite some time stimulative effect of the $1.5 trillion tax singled out for concern the strengthen- for a Trump attack; their only question cut and $300 billion spending increase ing of the dollar, which hurts his push was when. That’s because the central Congress passed last fall. Meanwhile, to expand U.S. exports and reduce the bank has embarked on a path of steady the yield curve has been flattening and U.S. trade deficit. He ignored the fact interest rate increases to keep a hyper- is close to inverting, a strong indicator that the dollar has been rising because stimulated economy from overheating of a coming recession. the American economy is so strong. and causing an outbreak of inflation.A t All that fiscal injection “is going to its August 1 meeting, the Fed signaled hit the economy in a big way this year Owen Ullmann is Managing Editor/ its intent to keep raising rates. and next year,” former Fed Chairman Special Projects at USA TODAY.

8 The International Economy Summer 2018 The Magazine of international economic policy View from the Beltway 220 I Street, N.E., Suite 200 Washington, D.C. 20002 Phone: 202-861-0791 • Fax: 202-861-0790 www.international-economy.com [email protected]

Trump acknowledged in the inter- The pressure is on Fed Chairman Jerome Powell view that he was breaking with estab- to try his hand at a soft landing to keep the lished policy in criticizing the Fed but, current expansion going without letting inflation true to form, was unapologetic: “Now get out of hand. If successful through mid-2019, I’m just saying the same thing that I Powell would oversee the longest continuous would have said as a private citizen. period of growth in U.S. history, surpassing the So somebody would say, ‘Oh, maybe Greenspan expansion of the 1990s. you shouldn’t say that as a President.’ I couldn’t care less what they say because my views haven’t changed.” And in typ- ical Trump aggrandizement, he said that despite his unhappiness with the Fed’s rate moves, “I’m letting them do what they feel is best,” ignoring the fact that ranch, where he was recovering from Volcker’s successor, Alan he has no authority over what the central gallbladder surgery, and publicly chas- Greenspan, clashed repeatedly with bank does. tised the Fed chairman for taking advan- officials from George H. W. Bush’s Numerous current and past Fed of- tage of him while he was ill. Despite the administration, particularly Treasury ficials had predicted just such comments intimidation, Martin stood his ground. Secretary Nicholas F. Brady, who com- from a man who has described himself Martin’s successor, Arthur F. Burns, plained openly that the Fed’s monetary as a “low interest rate” advocate and al- proved to have less backbone. The policy was too restrictive. Bush also ways speaks his mind, damn the conse- Nixon tapes reveal that the president sent Greenspan a message of presiden- quences. None would dare comment on pressured Burns to goose the economy tial displeasure by delaying Greenspan’s the record for fear of sparking his fury, in advance of Nixon’s 1972 re-election reappointment to a second term. Bush but they all see a growing collision com- campaign by keeping rates low even later blamed Greenspan’s aggressive ing, as interest rates rise, a stronger dol- though inflation was posing a grow- rate actions for his re-election loss to lar slows export growth, and financial ing threat. Nixon, who had appointed Bill Clinton in 1992 because of a weak markets react nervously to his willing- Burns, bullied him by leaking false sto- economic recovery. ness to stoke a global trade war. ries that Burns was seeking a big pay When Clinton took office, his direc- “It doesn’t take a huge imagination. increase and that Nixon planned to ex- tor of the National Economic Council, This is a President who would go after pand the size of the Board of Governors former Goldman Sachs Co-Chairman his own attorney general, individual so Burns wouldn’t be able to control Robert E. Rubin, insisted that all mem- companies, the prime minister of one it. Burns caved and later tried to blame bers of the administration respect the in- of our closest allies, so why would the the subsequent outbreak of inflation on dependence of the Fed and refrain from Federal Reserve think it would be ex- Nixon’s loose fiscal policy. any public comments on its conduct of empt?” confessed one source close to In more recent times, presidents monetary policy. top Fed officials. have been more respectful of the Fed’s That policy became known as Many presidents have challenged independence. Ronald Reagan backed Rubin’s Rule, which he continued to the Fed’s independence in past decades ’s assault on double-digit enforce when he became Clinton’s with mixed success. In late 1965, Fed inflation in 1981 even though the re- Treasury Secretary. It has been followed Chairman William McChesney Martin sult was a deep recession. The harmony with nary an exception ever since, in- Jr. had pushed through a hike in the dis- didn’t last. In 1986, Volcker clashed cluding by George W. Bush’s and count rate to keep inflation from break- with four Reagan appointees on the ’s administrations. ing out because of all the fiscal stimulus Board of Governors who wanted to cut Until the CNBC interview, Trump from increased spending on the Vietnam the discount rate over his objections. and his appointees abided by Rubin’s War, Johnson’s “Great Society” domes- Volcker prevailed, but the dispute con- Rule. Trump’s first director of the tic agenda, and a tax cut passed the year tributed to his decision to step down at National Economic Council, Gary Cohn, before. An enraged President Lyndon the end of his second term in 1987, and made a point of avoiding any criticism of Johnson summoned Martin to his Texas Reagan made no effort to dissuade him. the Fed, but his successor, Larry Kudlow,

Summer 2018 The International Economy 9 View from the Beltway

feels differently and shares Trump’s low- National Economic Council Director Larry interest-rate views. “Just let it [the econo- Kudlow shares Trump’s low-interest-rate views. my] rip, for heaven’s sake,” Kudlow said “Just let it [the economy] rip, for heaven’s in an interview on CNBC in March, a sake,” Kudlow said in an interview on CNBC in few weeks before officially assuming his March, a few weeks before officially assuming White House post. “The market’s going his White House post. “The market’s going to to take care of itself. The whole story’s take care of itself. The whole story’s going to going to take care of itself. The Fed’s go- take care of itself. The Fed’s going to do what it ing to do what it has to do, but I hope they has to do, but I hope they don’t overdo it.” don’t overdo it.” Kudlow has a point. The Fed is

hardly infallible in its forecasts or con- Ga g e Skidmore duct of monetary policy. “Fed forecasts are filled with a lot of mistakes,” con- Powell, who has a long record of policy would refuse to change course ceded a former senior Fed official. “We distinction and integrity in government for political reasons now that it is more didn’t see the depth service, pledged at his Senate confirma- open than in the past about its forecast The Fed of the crash in 2007, tion hearing last November to maintain for rate increases. In fact, Trump ti- was wrong the recovery was the Fed’s independence as it tightens rades may only stiffen Fed resolve to act slower and shallow- policy in advance of the crucial 2018 independently. about growth er than we expected, midterm elections and the presidential Trump’s criticism “risks undermin- and the leading to several election two years later. ing public confidence and makes the rounds of QE [quan- “I’m strongly committed to an Fed’s job harder,” predicted one Fed in- slowdown in titative easing]. Until independent Federal Reserve, and I sider. “We would take productivity. recently, the Fed was would add nothing in my conversations the high road and the Pressure wrong about growth with anyone in the administration has public punches. But we from Trump and the slowdown in productivity. Its given me any concern on that front,” won’t change course.” forecasting record is pretty crappy—but he declared. “I just would plan, if con- That is why other is sure to no worse than anyone else’s.” firmed, to follow in the footsteps of dis- recent administra- be futile. Achieving the proverbial economic tinguished prior chairs and of our long tions decided to avoid “soft landing” also is elusive for the tradition, really, to assure that we do second-guessing the Fed: Jawboning Fed, which more often than not has conduct monetary policy and financial would only hurt them by roiling markets kept rates too low for too long and then regulatory policy, by the way, without without achieving any policy change. overreacted with too many rate hikes. a view to political outcomes but with a Such reasoning is unlikely to per- Critics blame both the 2000 dot.com view solely to the right answers.” suade Trump to keep silent. He defied bubble bursting and the 2007 financial In a prescient interview a week his economic advisers in siding with his crash on the Fed for running an overly before Trump’s outburst, Powell reaf- political base over the markets by im- accommodative monetary policy. And firmed the Fed’s independence. “We posing tariffs on top trading partners and in retrospect, Greenspan probably was have a long tradition here of conduct- risking a trade war and the loss of U.S. too restrictive in fighting inflation dur- ing policy in a particular way, and that factory jobs. Bashing the Fed would ing the elder Bush’s presidency. way is independent of all political con- also be popular with Trump’s supporters Now the pressure is on Powell to cerns,” he told Marketplace host Kai who view the as part of the try his hand at a soft landing to keep the Ryssdal. “We do our work in a strictly Washington establishment they despise. current expansion going without letting nonpolitical way, based on detailed So with two more Fed rate in- inflation get out of hand. If successful analysis, which we put on the record creases scheduled for 2018 and another through mid-2019, Powell would over- transparently.” four likely in 2019, count on a torrent of see the longest continuous period of Indeed, pressure from Trump is sure Trump invective against Powell and Co. growth in U.S. history, surpassing the to be futile because the Federal Open over the next two years. It’s only going Greenspan expansion of the 1990s. Market Committee that sets monetary to get uglier. u

10 The International Economy Summer 2018