Does Trump have a point about the Fed?  One of the most interesting controversies of late 2018 was Trump’s public criticism of the Federal Reserve.  Traditionally, a sitting president has not publicly taken on the Fed.  Trump, unconventional as ever, has ignored this precedent.  He specifically criticized Fed leadership, Chairman Powell, and the aggressive rate increases over the past two years.

So, does Trump have a point? about the Fed?

Here’s a look at the Federal Funds target rate over the past 40 years.  The orange lines are what is known as Fed “tightening phases.”  These are periods when the Fed was raising rates.

If you take a look down and to the right, you’ll notice that the Federal Funds rate was basically zero for around 7 years, from 2009 to almost 2016 (October 2015).  After keeping the Fed Funds rate at almost zero for so long, the Fed finally got around to raising the target rate.  The initial increase was 0.25%.

After the initial 0.25% increase, the Fed waited another year to raise again.  Interestingly, they waited until after the November 2016 election.  This essentially meant that during the entire Obama administration, the Fed raised the rate 1 time and then once more after Obama had essentially become a lame duck.

The Fed has acted quite differently in Trump’s first two years.  In 2017, the Fed raised the target rate 3 times, and then 4 more times in 2018.  Obviously, this has raised the ire of the sitting president whose predecessor saw a much more accommodating Fed.

Again, does Trump have a point about the Fed?  It’s an interesting question.  If you’re an academic type who thinks the president has an agenda and the Fed doesn’t, then the answer is no.  But if you take more of a nuanced view, you should know economists have as much of an agenda as any elected official.

Does the Fed have an agenda?  We don’t know.  The Fed is heavily invested in preserving its standing as an unbiased observer.

Let’s take another look at what the Fed has done during Trump’s and Obama’s presidencies.

Do you see any bias in this graph?  This empirical data would suggest the Fed has a bias.  But, maybe the question isn’t empirical.

Let’s take one more look at the Federal Funds rate.  This one is the Federal Funds rate by party.  This chart goes from 1982 to 2018.  1982 is the year the Fed began targeting the interest rate again.

See any difference?

66 rate hikes during a Republican administration.

16 during a Democratic administration.

Hmm.  It seems you’d have to have unwavering faith in the integrity of the Fed to believe the institution has no bias.  But maybe not.

In any event, whether or not you believe Trump has a point, let’s examine something with a little less speculation to end the discussion. (See chart below)

Here’s the Federal Funds rate (blue graph) and recessions (gray bars).

If you look closely you’ll see three areas that are circled.  These are the points at which the Federal Funds peaked before a recession materialized.  Look where we are now.

See anything?

We’re still well below a level that would indicate a recession.  If the Fed raises twice in 2019 and twice again in 2020, the rate will be at 3.5%.  That’s still 50 basis points away from 4%, which is the threshold we’d have to see before a recession takes hold.

Conclusion

Does Trump have a point about the Fed?  Your answer to this questions likely depends on how you interpret the graphs presented here.  If you think pseudo-government officials have biases, then you’ll likely agree with Trump.  If, instead, you think pseudo-government officials are just impartial administrators of the programs they administer, then you likely see Trump’s comments as dangerous.  Hmm.

 

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