Remember the Great Recession of 2008?
Thanks to prosperity since then, memory may have faded. The steady growth in the American economy is largely the result of two-fisted government action by the president and the Federal Reserve. They each used different tools.
Increased spending on public projects can help turn the economy around. It pumps money into directly creating jobs, which produce even more jobs as the new income ripples through the country.
Soon after taking office, President Obama succeeded in getting Congress to adopt an economic stimulus that reached $831 billion. Tax cuts were a big part of the package, along with building roads and other public facilities. Some went to social benefit programs. New federal debt paid the bill.
A GOP Congress denied Obama any more stimulus spending, but later it was willing to add to the public debt by adopting more tax cuts. President Trump signed off on them, and the recovery continued.
The stimulus alone would not have brought the strong recovery. Much of the sustained work was handled by the Federal Reserve. On its own, it lowered interest rates, making borrowing easier for new homes and business expansion.
The Fed also stepped up lending to banks, so they could more easily offer mortgages and money for economic development. By lowering interest rates and making more debt available, it used its powers to aid the economy.
Created in 1913, the Fed has mandates to fight inflation, when prices and interest rates rise too quickly, and to promote job creation. Its moves affect all other banks and it serves as the federal government’s bank, making it the central bank. Other countries also have central banks.
The U.S. central bank is meant to operate outside of political control. Its board members are appointed for 14 year terms. The long terms are intended to insulate the Board, which receives no taxpayer funding, keeping it independent of the politics of the day.
The president and Congress may want the Fed to promote easy money, allowing them to take credit when running for reelection. They are likely to be less concerned about long-term effects, whatever the Fed’s responsibility.
When he was running for reelection in 1972, President Nixon induced the Fed chair to lower interest rates. That produced a short-term push to the economy but led to huge inflation that hit under President Carter.
Now having slashed interest rates and bought enormous amounts of debt to beat the Great Recession, the Fed has few tools left to combat another downturn. You cannot cut rates to stimulate the economy when they are already low.
So the Fed has begun trying to rearm itself by gradually raising rates and reducing the amount of bank debt it holds. By returning to normal levels, it will later be able to make cuts to help recovery in case of another downturn. It has been going slowly, because there is little inflation.
Trump has promised great economic growth. While he can take some of the credit for the sustained recovery, he wants levels of growth that would be unusually high. This year, he is not achieving his goals, which probably would have eluded any president or policy.
He blames the failure to reach high growth rates on the Fed, including Jerome Powell, his own appointee as chair. Trump believes that raising rates, even slowly and slightly, hampers the achievement of his forecast growth. It’s obvious he dislikes the Fed’s independent monetary policy.
He scorns Powell, admitting he is “stuck” with the Fed chief, but keeps up his pressure. Powell resists resigning. But he has led the Fed to back off plans for more small rate boosts.
Trump has picked candidates for two open slots on the Board. Stephen Moore is a political commentator with no academic or business background to help him with the complexities of monetary policy. Herman Cain is a businessman who shows no understanding of the Fed. Both have made misstatements about the Fed.
Trump’s economics are misguided, designed only to win him an election, and his appointees, both Trump loyalists, would vote to decrease rates. Nobody would worry about post-election inflation.
The Fed committee that makes policy has 12 members. So these appointees could not themselves change interest rates. But they could politicize the Fed.
Congress created the Fed as an independent body. It was meant to keep the economy on a steady course, not subject to political swings.
Will the Republican Senate refuse to confirm political appointees or appease Trump in hopes he will lead the GOP to electoral victory?