Listeners may be forgiven if a July 21 article in the New York Times has been long forgotten. However, for this economist, the topic -- Trump’s complaints that the Federal Reserve’s interest rate policies were dampening economic growth -- was significant. Once again, President Trump was contradicting candidate Trump.
Back in 2008, the FED – our Central Bank took vigorous steps to combat first the financial crisis and then stimulate the economic recovery from the Great Recession. To combat the financial crisis and prevent it from causing a second Great Depression, Fed Chairman Ben Bernanke joined with Treasury Secretary Henry Paulson to persuade President George W. Bush to recommend $700 billion in extraordinary spending from Congress to bail out the financial sector. Congress ultimately passed the Troubled Asset Relief Program (TARP). Beyond the recommended spending by for TARP, the FED on its own made trillions of dollars of potential loans available to banks and in fact about $2 trillion in loans were actually made.
Once the financial crisis had passed with only a few large institutions (Lehman Brothers for example) failing and others forced into mergers, the FED turned its attention to stimulating the economic recovery. To do this, it utilized the major tool at its disposal -- it cut interest rates. The rate it directly controls – the Federal Funds Rate (the rate banks charge each other for very short term – sometimes overnight – loans) was reduced to close to zero where it stayed from 2008 through 2016. The prime rate, (the rate banks charge their most reliable business customers) stayed below 4 percent during those years and mortgage rates fell as well. (The average mortgage rate fell below 5 percent in 2010 and was below 4 percent in four of the next six years. The rationale for lowering interest rates is that this lowers the cost of investing. The cost of consumer spending on interest-sensitive items like cars and homes also falls. It this policy works, investment rises and consumer spending on homes and cars does too.
Unfortunately, businesses do not only consider costs when making investment decisions --- they consider how many items they can sell. After the Great Recession of 2007-2009, businesses were very worried about future sales. Unemployment had jumped dramatically. Many still working had lost their homes to foreclosure or were in danger of losing their homes. These folks were reducing their spending. The result was that business investment took years to recover, despite the very low interest rates.
In the depths of the Great Recession, investment was 12.7 percent of GDP. However, unlike previous deep recessions (1982-83 and 74-75 for example) when the Investment to GDP ratio rebounded quickly (reaching 17.2 percent in 1976 and a dramatic 20.3 percent in 1984), in the years after 2009, investment as percentage of GDP rose much more slowly. It took three years from 2010 through 2012 for investment as a percentage of GDP to reach 15.5 percent. It reached a maximum of 17.1 percent in 2015 before falling slightly in 2016 (it remained below 17 percent for 2017 as well). The percentage achieved in 2016 was about the same percentage that had occurred at the depth of the previous recession in 2001.
One of the reasons investment took so long to recovery is that consumer spending was depressed for much of the recovery period. Consumers were more likely to drive that old car a year or two longer rather than buy a new one --- and of course, sales of homes were way down even with low mortgage rates.
As a result, the FED kept interest rates very low for years into the so-called recovery.
(Yes, that’s right, the economy seemed lousy between 2010 and 2015, but the Recession had officially ended in June of 2009!)
By 2010, with the financial crisis safely behind us, politicians (and too many economists) reverted to form, worrying about government deficit spending and low interest rates rather than the persistence of high levels of unemployment. (The unemployment rate was at 5 percent just as the Great Recession was beginning and it took over six years of recovery for the unemployment rate to return to that number at the end of 2015.) In 2011, Congressional Republicans forced a “compromise” on President Obama where they agreed to restrain federal spending because of a ridiculous fear that deficits would somehow harm the economy. In fact, of course, deficits were what was necessary to stop the bleeding from the Great Recession and spearhead a recovery --- reducing the deficits made the recovery more sluggish. [For details, have a look at Howard and Paul Sherman’s and my textbook Principles of Macroeconomics: Activist vs. Austerity Policies, 2nd edition, August 2018; chapter 18.]
For one extreme example of criticism of the FED we note that when Governor Rick Perry of Texas was running for the Republican Presidential nomination in 2011, he accused Fed Chairman Bernanke of TREASON for his low interest rate policy which he (Perry) claimed would debase the dollar with (imagined) future inflation.
Of course, no such inflation occurred, as the Fed continued its low interest policy through 2016. In 2016, candidate Donald Trump asserted that the Yellen FED was keeping interest rates too low in order to help President Obama (and therefore candidate Hillary Clinton).
A New Yorker piece in September of 2016, referenced Trump’s attacks on Yellen’s policies: “[Trump] told CNBC that Yellen should be “ashamed” of the low-interest-rate policy that Trump himself endorsed so fully in May. “She is obviously political, and she’s doing what Obama wants her to do,” he said. … Trump made the claim that there was a secret Obama-Yellen pact to keep rates low, rooted in their nefarious desire to prevent an economic crisis. They both knew, he said, that “as soon as [rates] go up, the stock market is going to go way down.” On Thursday, after giving a speech at the Economic Club of New York, Trump again took aim at the Fed. “The Fed has become very political,” he said. “Beyond anything I would have ever thought possible.”
Now, the shoe is on the other foot. Trump is President and he wants to keep the economy rolling. Suddenly, raising interest rates is bad for the economy. Forgotten are the complaints he made as a candidate. With Janet Yellen gone from the FED, the new chair, Jerome Powell, is from the more traditional school which worries more about inflation than unemployment. Despite a mandate from Congress that requires the FED to concentrate on achieving both low unemployment and low inflation, the FED has almost always demonstrated a greater concern with inflation the usual pattern is to raise interest rates whenever unemployment appears about as low as they think it can go.
This is how the FED has behaved since it set out to conquer inflation in 1979. Over the course of a double dip recession in 1980 and 1981-82, the FED permitted unemployment to reach an unprecedented post World War II level of ten percent. Over the course of the 1982-1990 recovery period, unemployment did not fall below 6 percent until 1988 and never fell below 5 percent for the entire decade.
The FED’s policy, which was evident in 1988 and 1994 was to worry whenever unemployment got too close to 5 percent. When the economy seems to be “overheating,” they respond by raising interest rates. One of the only times they did not do this was early in the first term of President George W. Bush when the Fed was attempting to stimulate the economy after the stock market crash in 2000 and the post-9-ll uncertainty. They raised rates between 2004 and 2007 and they are raising rates now. That’s what they do. Donald Trump can yell and complain all he wants but the FED will probably keep raising interest rates right up to the start of the next recession. Ironically, Trump’s politically motivated criticism of the low interest FED policy under Janet Yellen makes it harder to oppose a wrong-headed policy of raising interest rates today. Trump’s early complaints become ammunition for those defending the current FED policy of raising interest rates --- contradicting Trump’s current complaints.
Once again, we see the double-talk of politicians. In this respect, the so-called outsider has learned very well how to be a politician. It is also possible that the most ignorant man ever to become president of the United States doesn’t even realize he’s contradicting himself. That’s possible too.
Michael Meeropol is professor emeritus of Economics at Western New England University. He is the author (with Howard Sherman) of Principles of Macroeconomics: Activist vs. Austerity Policies.
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