Reference no: EM133038461
Case Study President Trump's Attempts to Direct Monetary Policy for the United States
In the past few years as President of the United States, Donald Trump has been doing everything in his power to stabilize and strengthen the economy. This mainly includes fiscal policy changes such as recent tax cuts and increased tariffs primarily against China. As Trump alters the fiscal policies of the country, he's been trying to influence the monetary policy as well. The problem for Trump is that the President isn't directly responsible for determining monetary policy. The entity that is responsible for American monetary policy is the Federal Reserve Bank (the Fed), specifically, the Federal Open Market Committee. Fortunately for Trump, he's never been shy about stating his opinions. His attempts to direct monetary policy have been through communication (both direct and indirect) with the Federal Reserve Bank and its chair, Jay Powell. As President, Trump has been trying to influence the actions of the Fed by criticizing and critiquing them repeatedly in interviews and tweets.
During the 15 years prior to Trump's presidency, the commanderin- chief has generally stayed quiet about "The Fed" and let them do their own thing. However, it is not unheard of for the President to get involved with the Chair of the Fed. In 1965, Lyndon Johnson is said to have tried to physically intimidate William McChesney Martin. Additionally, Harry Truman had a public battle with Chairman Thomas McCabe in which McCabe resigned. Now, Trump probably isn't going to go over to Jay Powell's house and threaten violence, but he has been making it very clear to Powell and the public when he thinks the Fed's actions are unwise. This is slightly ironic because Trump appointed Powell and the majority of the Fed's cabinet.
The Federal Reserve Bank raised interest rates four times in 2018, getting the rate up to about 2.5 percent as the economy grew. Then came the trade war. This war reversed the growth of 2018, as well as cultivated disagreements between Trump and Powell.
At the beginning of 2019, Trump made it clear that to be proactive and counteract this slowdown, the American government needed to lower interest rates substantially, stating that it would lure investors to the United States and increase the amount of money circulating in our economy. Before the July meeting of the Federal Reserve Bank, Trump called for a "big cut" to our country's interest rates, encouraging the Federal Reserve Bank to take the interest rates at the time down to zero, or even to negative levels. Although the Federal Reserve Bank, lowered interest rates, they disagreed with Trump on the extent of the rate reduction that was needed.
In July of 2019, for the first time in a decade, the Federal Reserve Bank lowered the interest rate down to 2.25 percent. Before this time, Trump had been calling their actions "unnecessary and destructive" to the U.S. economy. Then, in September of 2019, they made a cut from 2.25 percent to just under 2 percent, to which President Trump responded on Twitter, saying "Jay Powell and the Federal Reserve fail again. No Guts, no sense, no vision!" He wanted an even larger cut. In October, they continued the trend and lowered the rates again to 1.5- 1.75 percent. Trump continued to comment, saying that they weren't dropping the interest rates enough. He said in a tweet, "China is not our biggest problem, the Federal Reserve is!" Although the Federal Reserve Bank was moving in the direction Trump wanted, they were not moving at the speed he wanted. In 2019, Trump had tweeted (or retweeted) 43 times criticizing the Federal Reserve Bank. It is unclear whether or not these tweets and statements have affected Jay Powell and his advisors or not because although they were going in the direction Trump is urging them, analysts predicted that they would lower the interest rates regardless of Trump's opinions.
In 2020, President Trump was at it again. With the slowing of the economy in China due to the corona virus, the U.S. stock market moved significantly negative. In response, the Fed convened an emergency meeting and lowered rates a surprise ½ percent but Mr. Trump expressed his disappointment with the move. He tweeted, "Our pathetic, slow-moving Federal Reserve, headed by Jay Powell, who raised rates too fast and lowered too late, should get our Fed Rate down to the levels of our competitor nations."
Additionally, Trump has threatened to fire the Chair on multiple occasions, although the central bank is technically under the jurisdiction of Congress. This means Trump would have to convince them that Powell's actions are harmful to the country. Powell has stated that he would resist the President should these measures be taken against him. Such direct and sustained attacks on the Fed from a sitting president are unprecedented.
Case Discussion Questions
- Who should have control over monetary policy in the United States?
- How involved should the President be?
- Why has economic growth been stagnant with the current monetary policy and what adjustments should the Fed make?
- Given the current economic environment, do you think the Federal Reserve Bank should lower interest rates even more?
- Some countries in Europe have opted for negative interest rates. What would be the advantages and disadvantages of such an approach?