As President Trump this week relentlessly assaulted the Federal Reserve, analysts pondered each tweet. Does the President not know that the Fed ended quantitative tightening? Might he want an inverted yield curve? What might one infer about exchange rates? The short answer to each of these questions is that President Trump isn’t tweeting about monetary- or even exchange-rate policy – he’s tweeting about himself. A decade in which post-crisis monetary policy made America still less equal gives him a vulnerable target and he’s taking full advantage of it.
Mr. Trump isn’t the first sitting president to lambast the Fed, but he’s likely to be the first to profit thereby. Lyndon Johnson pushed William McChesney Martin up against a wall, President Nixon fired Arthur Burns, and George H.W. Bush blamed Alan Greenspan for his 1992 loss. In each case, the president wanted more accommodation and the Fed stood by Mr. Martin’s interpretation of its mandate: to take away the punch bowl.
Now, though, the Fed has not only kept the punch bowl on the table, but also spike it with the July rate cut and decision to restart quantitative easing. Mr. Trump still isn’t satisfied because Mr. Trump doesn’t care what rates are or how big the Fed’s portfolio may be – he cares about who voters think is to blame for slower growth and market turmoil and he is determined to be sure it isn’t him.
Making it still easier for a president facing a lot of economic risks, the Fed is extremely vulnerable because its own actions have alienated all but the most elite Americans. Mr. Trump has an innate instinct for the jugular and the Fed’s throat is on full display. The central bank’s political legitimacy has always been tenuous and never more so than now. Populists and progressives now agree that the Fed protects Wall Street at the expense of Main Street. One might think the Fed’s rate cut satisfied both sides of the spectrum, but it only made each still angrier. Populists side with the President and progressives believe the rate cut is a move to stabilize markets, not improve equitable macroeconomic growth.
Mr. Trump is on to something because the Fed’s post-crisis policy has given him the upper hand. For all its vaunted independence, Fed policy has played a major role making the U.S. still less equal even faster since 2010. For why this is and how quickly equality is evaporating, see our Economic Equality blog.
One reason Mr. Trump won the White House is that many voters believed that only radical economic policy could reverse their slide down the income and wealth ladders. Former Fed chairs can write all the letters they want about the need for central-bank independence – unless or until the Fed comes up with equality-enhancing policy, concessions to the president will only strengthen Mr. Trump’s hand and make the Fed’s independence still more fragile.