One sometimes wonders if Trump’s irresponsible statements have other objective than to show his bold ignorance on economic and political issues. Last week, the US President lashed out at the Federal Reserve for its stance on monetary policy. In a nutshell, he complained about the dollar appreciating against the Euro as a result of Fed’s policies. This, according to Trump, undermines the country’s competitiveness against the Eurozone.
Unfortunately, this isn’t the first time that Trump takes his frustration out on the US central bank. Last year, he criticized Fed Chairman Jerome Powel for increasing interest rates in a time when international trade disputes demanded, according to him, accommodative monetary policy. What’s wrong with Trump criticizing the decisions of the Fed?
To begin with, Trump seems unaware that the ultimate objective of the Federal Reserve isn’t to fine-tune the exchange rate of the dollar to the euro or the yuan in order to make exports more competitive, but to maintain price stability and promote maximum employment. Assuming that the Fed’s policy over the last years has been aimed at achieving this goal, it seems ridiculous to attack the US monetary authority for sticking to its mandate.
This doesn’t necessarily mean that the contractionary monetary policy carried out by the Fed since 2015 has been wise. This is topic for another article. Yet Trump should know by now that the Fed has a dual mandate that can only be modified by Congress. If he thinks the Fed should have as a main goal to devalue the dollar against other reserve currencies (an economic nonsense, by the way), he just needs to push legislation in Congress to amend the Federal Reserve Act.
But Trump’s economic illiteracy on monetary issues shouldn’t be of great concern. After all, he’s not in charge of making monetary-policy decisions. The problem isn’t so much his ignorance but the potential impact of his words: every time the US President questions the Fed for doing its job, it undermines its independence.
Imagine the FOMC, the committee within the Fed in charge of making the monetary-policy decisions, decides in its next meeting to lower its policy-rate target via open market operations in order to meet its long-term inflation objective. Even though the decision had nothing to do with Trump’s pressures, wouldn’t the credibility of Jerome Power as an independent central banker be undermined, especially if we take into account that he was nominated to the Fed chair by the current US President?
Empirical evidence suggests that independent central banks tend to achieve lower inflation rates than politically-influenced ones. In effect, recent history shows that when the printing press is controlled by governments and not independent central banks, things always go wrong.
To achieve long-term price stability, countries must have credible central banks. And credibility can only be earned if a central bank is independent from political power. Fortunately, the US institutions (the Fed included) are robust enough to withstand the shenanigans of an irresponsible president.