President Trump has made a regular habit of criticizing the Federal Reserve, and on Friday he tweeted that the central bank’s “faulty” decision-making was causing Americans to pay higher interest rates than other nations.
The Federal Reserve is supposed to keep the economy growing at a steady pace. Mr. Trump nominated its chair, Jerome H. Powell, and three of its other four sitting governors, but those leaders are confirmed by the Senate and operate independently of the White House. And Mr. Trump has no tie to the 12 Fed district bank presidents, who are selected by regional representatives. The Fed is insulated from politics by design so that it can make good long-term decisions rather than responding to election cycles.
The lack of control seems to rub at the president. He regularly blasts Fed policy, blames Mr. Powell and his colleagues for weakening the economy, and points out that President Xi Jinping of China has far more control over his own central bank. He’s even reportedly looked into firing or demoting Mr. Powell, though he has since said that such a move is not under consideration — and it’s not clear that it would be legal.
Here’s a fact check on his latest comments.
What Mr. Trump Said
“Because of the faulty thought process we have going for us at the Federal Reserve, we pay much higher interest rates than countries that are no match for us economically. In other words, our interest costs are much higher than other countries, when they should be lower. Correct!”
— on Twitter on Friday
This is misleading
It is true that Federal Reserve has raised interest rates nine times since 2015, leaving the federal funds rate, its main policy tool, at 2.25 to 2.5 percent. That is, indeed, far higher than rates in advanced economies including the eurozone and Japan, where some policy rates remain in negative territory.
But context is important here.
First, the Fed has not raised rates since December 2018 and has actually set up for a potential cut at its July meeting, as trade tensions stoke uncertainty and threaten the economic outlook.
Second, the central bank raised rates specifically because the United States economy was stronger than its global counterparts. Central banks are supposed to keep the economy operating at an even keel. They rein in lending and spending during good times with higher rates so that they can slash borrowing costs in times of economic turmoil, giving businesses and consumers a boost.
The United States economy has experienced a stronger recovery and expansion than Europe’s, in particular. Unemployment fell earlier and faster than in France and Italy, for instance. That prodded the Fed to get moving on raising rates, which it had dropped to near zero during the Great Recession.
Finally, it’s worth noting what Mr. Trump labels as the Fed’s “faulty thought process” is in the middle of a shake-up. The central bank raised interest rates partly because joblessness had fallen substantially — it is now at its lowest in about 50 years — and in the past, that has helped to push wages higher, which in turn spurred businesses to lift prices. The Fed is tasked with maintaining both a strong job market and low and steady inflation, so it nudged rates higher at a historically slow pace, trying to keep a lid on prices without totally killing off the labor market rally.
But the relationship between economic strength and inflation did not hold up this time. Instead of accelerating, price gains got stuck below the Fed’s 2 percent goal. Mr. Trump often points out that inflation is weak, and argues that rates should not have been raised so much or so quickly.
That argument is not falling on deaf ears. As it became more obvious that something had changed in the old jobs/wage relationship, the Fed stopped its campaign of raising rates and decided to adopt a wait-and-see approach. Now, officials seem to be preparing to cut rates on July 31, and they’ve been clear that they would tolerate a pickup in inflation without lifting rates to offset it.
Mr. Trump reiterated his message in a series of follow-up tweets responding to a speech that Federal Reserve Bank of New York president, John Williams, delivered on Thursday.
In the speech, Mr. Williams laid out a case for why cutting rates early and leaving them lower for longer can have benefits when interest rates are at very low overall levels thanks to demographics and other longstanding factors, which is the case now.
Investors and some Fed watchers at first interpreted the comments as an intentional hint that the central bank was going to cut rates sharply in July, but the New York Fed clarified that the speech was not meant to send a policy signal.
Mr. Trump’s tweet also nods at the national debt. When the Fed raises rates, it causes the government to pay higher interest rates on the money it has borrowed from investors. To illustrate how much this matters over time, if rates paid on federal debt are 1 percentage point higher than the Congressional Budget Office’s base-case estimate each year, debt will equal 199 percent of annual output in 2049. If they’re 1 percentage point lower, it will be just 107 percent.
Likewise, stronger growth leads to better tax revenue, which can help to shrink the debt and the amount spent to service it.
At the end of the day, though, recessions are a major threat when it comes to government deficits. They force fiscal spending to try to reinvigorate growth, and result in a drop in tax revenue, both of which can add to the debt substantially. By smoothing out the business cycle so that downturns are less painful, the Fed could actually be seen as a debt fighter.