President Donald Trump has renewed his quarrel with the Federal Reserve, tweeting again that the central bank is a bigger problem for the U.S. economy than China. Whether or not it’s wise for the president to lash out in public, he’s right to be concerned. An excessively tight monetary policy from the Fed helped to get him elected, and could contribute to his defeat next year.
The Fed spent much of 2015 signaling that it wanted to raise the federal-funds rate and began raising it in December of that year. Through the end of 2018, it would hike rates eight more times, and simultaneously shrink its balance sheet. The Fed embarked on this tightening cycle even though inflation had been persistently below its announced target of 2 percent per year, and even though inflation expectations had been falling since 2014.
This was a mistake. The Fed was heavily influenced by the theory that a too-low rate of unemployment would cause inflation to rise. But it’s turned out that the unemployment rate can safely go lower than central bankers had thought. The Fed has implicitly admitted as much by continually lowering its projections for long-term unemployment. The actual rate has kept dropping to new lows, and inflation has remained below target. The Fed didn’t need to raise rates as far and as fast as it did.
Neel Kashkari, the president of the Minneapolis Fed, has pointed out that policymakers also overestimated the neutral interest rate and, as a result, were running a tighter monetary policy than they realized or intended.
This tightening cycle wasn’t one of the worst blunders in the Fed’s history. The contractionary policies of the Great Depression, the 15 years of loose money starting in the late 1960s and the failure to cut rates at the start of the recession of 2007-2009 did more damage. But this mistake had negative consequences of its own: It suppressed the growth of employment, wages and asset values. Economic growth slowed enough in 2015 and 2016 that some analysts have looked back on it as a “mini-recession.” One sector particularly affected by the slowdown was manufacturing.
Exit polls conducted on Election Day in 2016 showed that substantial majorities of voters in Michigan, Pennsylvania and Wisconsin — the three crucial states that gave Trump his electoral majority by swinging to the Republicans — rated the economy as poor. And the voters who felt that way selected Trump by a two-to-one margin.
Those numbers, it’s true, don’t prove that Hillary Clinton would have won with a stronger economy. Partisanship being what it is these days, a lot of voters’ assessments of the economy follow their choice of candidate rather than lead to it. But remember that she would have won if even 40,000 additional people in those three states had chosen her over Trump. The margin was so thin, it seems highly likely that even a slightly perkier economy would have changed the results.
You wouldn’t expect Trump to be grateful to the Fed for helping to put him in power. But if he were aware of the role it played in the election, he might be even more intent on getting it to lower interest rates and engage in quantitative easing now. If the Fed errs again on the side of monetary tightness, it could help his opponent get elected.
Ramesh Ponnuru is a Bloomberg Opinion columnist. He is a senior editor at National Review and a visiting fellow at the American Enterprise Institute.