Monday, 08 April, 2019
Fed May Bow to Trump’s Call for Rate Cuts If Inflation Softens
2019-04-07 13:00:00.0 GMT
By Rich Miller
(Bloomberg) — With his call for lower interest rates,
President Donald Trump has weighed into a debate inside the
Federal Reserve about what central bankers should do about sub-
par inflation. It’s not totally crazy to think he’ll eventually
carry the day.
In advocating easier credit, Trump and senior economic
adviser Larry Kudlow have harped on the paucity of inflation to
justify their call for a change of course by the central bank,
even with the U.S. economy still expanding.
“The Fed should drop rates,’’ Trump told reporters on
Friday after the government reported a larger-than-expected jump
in payrolls for March. “They really slowed us down. There’s no
By highlighting weak inflation, Trump touched on a
sensitive subject for Fed officials who’ve been struggling to
Monetary policy makers have been surprised by how tame
inflation has been and have cited “muted’’ price pressures as a
reason why they can afford to be patient in deciding their next
move, after four rate increases in 2018. Indeed, Chairman Jerome
Powell has said he doesn’t feel the Fed has “convincingly’’ hit
its 2 percent inflation target after years of running mostly
“I’m not sure we have a big disagreement here, maybe one of
timing,’’ Kudlow said in a Bloomberg Television interview on
Investors also seem convinced that it’s only a matter of
time before the Fed lowers rates, based on trading in the
federal funds futures market.
So far, though, central bankers don’t show an inclination
to ease credit.
“I would never say never to a cut,’’ Philadelphia Fed
President Patrick Harker said on April 4. But “in my forecast, I
don’t foresee it for this year or next.’’
In fact, Harker and some other Fed officials think rates
are more likely to rise than fall.
The administration’s push for lower rates isn’t only about
economics, of course. It’s also about politics. Because monetary
policy works with a lag, it would be better for economic growth
in 2020 — and for Trump’s re-election prospects — if rates
were cut in 2019.
“We don’t want measures that will restrain the economy or
financial market conditions,’’ said Kudlow, who also called on
the Fed to stop reducing its balance sheet. In laying out the
case for Fed rate reductions “at some point,’’ he said that not
only is inflation low, it is headed lower.
Kudlow said Trump’s tax cuts and deregulatory actions are
boosting the supply side of the economy — prompting companies
to add to capacity and boost worker productivity, while
encouraging Americans who’ve been on the sidelines to re-enter
the labor force.
“Strong growth is not inflationary especially when it comes
from the supply side of the economy,’’ Kudlow said.
He said that the two men Trump intends to nominate to the
Fed board — tax-cut advocate Stephen Moore and businessman
Herman Cain — will make that argument when they join the
Read More: Trump Urges Fed to Open Up Monetary Floodgates
to Juice Economy
If inflation were to move broadly lower, the Fed probably
will reduce interest rates, said Peter Hooper, a 26-year veteran
of the central bank who’s now Deutsche Bank Securities chief
economist in New York.
There’s a precedent for that. In December 1995, the central
bank trimmed rates by a quarter percentage point because
inflation was weaker than expected. It followed that up with
another quarter-point cut in January 1996, again citing reduced
The personal consumption expenditures price index — the
Fed’s favored inflation gauge — rose 1.4 percent in January
from a year earlier. After stripping out volatile food and
energy prices, the core index was 1.8 percent.
Most economists, including those at the Fed, are skeptical
that the economy will get anything like the supply-side boost
that Kudlow is talking about. As a result they forecast that
inflation will rise, not fall, in the future.
Behind many of those predictions: the belief that an
increasingly tight labor market will force companies to pay
their workers more and eventually prompt employers to raise
prices to maintain profits.
The trouble is that those relationships — broadly known in
economics as the Phillips Curve — haven’t really been working.
Inflation has stayed low even as unemployment has fallen to
around a five-decade low. It’s currently at 3.8 percent and has
spent the past year between 3.7 percent and 4 percent.
Powell confessed on March 20 that there’s “no easy answer’’
to explain why price rises have been so subdued.
Two possible reasons he cited were that the labor market
might not be as tight as policy makers believe, or that
inflation expectations might have slipped lower. Expectations
matter because they govern how consumers and companies behave
and so help determine the future performance of prices.
After listening to what Powell and Vice Chairman Richard
Clarida have been saying recently, Kudlow said he didn’t think
that the administration and the Fed were that far apart on the
issue of monetary policy.
“I think we’re reaching common ground here,’’ he said.
–With assistance from Jeanna Smialek.
To contact the reporter on this story:
Rich Miller in Washington at firstname.lastname@example.org
To contact the editors responsible for this story:
Brendan Murray at email@example.com