The Federal Reserve's Coming Rate Cut Is Debatable; Trump's Reckless Interference Isn't

By Daily Editorials

August 2, 2019 3 min read

The Federal Reserve is expected to cut interest rates Wednesday, despite the continuation of low unemployment and the longest economic expansion in U.S. history. The Fed denies it's responding to bombastic pressure from President Donald Trump, but it's difficult to believe that Federal Reserve Chairman Jerome H. Powell, a Trump appointee, is completely unswayed by Trump's irresponsible tirades.

That would be a terrible reason for a respected and independent body like the Fed to make any decision. A rate cut is a solution to economic problems that aren't currently evident but probably will develop because of trade policies by Trump that have sparked global economic instability.

There are reasonable arguments on both sides. What's not reasonable is that Trump, trashing norms as usual, has inserted himself into the rate debate to the point that even a justified cut by the Fed makes it look politically tainted. When Trump meddles this way in monetary policy, he weakens public trust in the Fed's independence.

The Fed, America's central banking system, sets interest rates that guide what lenders — of everything from car loans to mortgages to credit cards — use to set their rates. In times of economic distress, the Fed can cut rates to spur spending and investment. When the economy is heating up too quickly, the Fed can raise rates to turn down the temperature.

The long economic expansion that began under President Barack Obama and continues today is largely the result of deep rate cuts the Fed used to dig the nation out of the 2008 financial crisis. Today, the main rate sits at a historic low, just under 2.5 percent.

Within this generally strong economy, though, there have been hints a downturn is coming. Economists are divided on whether the Fed should act proactively and cut rates now or continue the cautious wait-and-see posture it has held for years. The Fed is expected to approve a quarter-percent cut this week. Any cut in a time of robust employment is unusual, but such a modest cut may in fact be necessary.

The problem is that Trump has been haranguing Powell and the Fed relentlessly to drop rates and has already indicated he won't settle for such a small cut. Never mind that what dark clouds there are on the economic horizon are largely the result of Trump's reckless trade wars. Never mind that any cuts made during this strong economy could limit the range of future options if a real recession hits. And never mind that the Fed is supposed to operate autonomously, based on data, not presidential fiat.

Experience suggests telling the president to back off is like shouting into a hurricane. But Trump should respect the Fed's independence; still his Twitter thumbs and let the experts do their jobs.


Photo credit: stevepb at Pixabay

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