Trump pushes Fed to lower interest rates in series of tweets

President Donald Trump

President Trump upped the ante Tuesday in his campaign to browbeat the Federal Reserve into keeping interest rates low, calling for a 1 percentage point rate cut and a revival of its bond-buying stimulus.

In a series of tweets published Tuesday, Trump said the lower rates along with "quantitative easing" would bolster the economy.

“We have the potential to go up like a rocket if we did some lowering of rates, like one point, and some quantitative easing,” Trump wrote.

"Yes, we are doing very well at 3.2% GDP, but with our wonderfully low inflation, we could be setting major records &, at the same time, make our National Debt start to look small!"

The comments mark the latest and most pointed turn in Trump’s repeated criticism of Fed Chairman Jerome Powell, a strategy that has broken with a 25-year tradition of U.S. presidents steering clear of remarks on Fed policy out of respect for its independence.

Trump’s top economic advisor, Larry Kudlow, recently called for a half-point rate cut but the president is going even further.

Trump recently announced his intention to appoint two loyalists to the Fed’s board of governors, former Republican presidential candidate Herman Cain and conservative pundit Stephen Moore. Cain withdrew last week in the face opposition from Republican senators but Moore remains in the running.

Ironically, Trump's remarks come as the economy has shown surprising strength even though the length of expansion is nearing a record, at 10 years, and growth normally would be slowing at this stage. The economy grew at a 3.2% annual rate in the first quarter, and 2.9% in 2018, matching a 13-year high, partly because of Trump-led tax cuts and spending increases that have widened the deficit.

“What he’s saying is introduce more stimulus at a time when the economy is still growing rapidly,” says economist Paul Ashworth of Capital Economics.

Trump is correct that a core measure of annual inflation that excludes volatile food and energy costs remains unusually low, dipping to 1.6% in March from 1.7% in the prior month, the Commerce Department said Monday. That’s below the Fed’s 2% target, giving the Fed more breathing room to keep rates low.

Some analysts do expect the Fed to trim rates by next year as the economy slows, and Powell hasn't ruled out the move. But of cutting rates a full percentage point, Ashworth says, “I don’t think it would be a realistic thing to do. The risk of higher inflation in the future would be too high” partly because consumer and business expectations for inflation would rise. The move also would increase the chances of assets bubbles forming as investors move money from bonds to higher-risk securities.

The Fed’s key interest rate, Ashworth says, is already unusually low at 2.25% to 2.5%. Chopping rates further, he says, would incur the additional risks without significantly juicing economic growth.

Trump also called for renewing the Fed’s bond purchases, which held down long-term rates after the financial crisis. Since October 2017, the Fed gradually had been shedding the $3.5 trillion in Treasury bonds and mortgage-backed securities that it purchased, nudging rates higher. But the central bank recently announced that it would end that runoff in the fall. Trump is now exhorting the Fed to go a step further and buy more bonds to push down rates again.

Ashworth says more bond purchases would pose even greater risks than rate cuts of faster inflation and asset bubbles.

Trump, he adds, is likely calling for the moves to goose the economy and boost his 2020 reelection chances without accounting for the longer-term impact.

More broadly, Trump’s criticism of the Fed jeopardizes the public's confidence in the agency’s ability to raise or lower interest rates for the good of the economy rather than for political reasons, says Peter Conti-Brown, a professor of legal studies and business ethics at the Wharton School in Philadelphia. 

Powell, though, repeatedly has said the Fed is not influenced by politics.

Since last July, Trump has blasted Powell and the Fed for raising rates last year, saying the moves have stymied his efforts to deliver on his vows of 3% or better economic growth. In December, after the Fed hiked its key short-term rate a fourth time last year amid a slowing global economy, the stock market plunged, prompting the Fed to abruptly reverse course. The central bank recently forecast no rate increases this year and is not expected to lift rates at a two-day meeting that ends Wednesday.