Presidents never like interest rate hikes, or, the old jawbone

President Trump, in his usual way of speaking, told Joe Kernan of CNBC that he doesn’t necessarily agree with the Federal Reserve’s raising of interest rates. This act, known alternatively as ‘moral suasion’ or ‘jawboning’, has actually been happening for a while. Economic adviser Larry Kudlow did almost the same thing on Fox News three weeks ago.

Criticism has been coming in from many quarters, not all from the usual sources. Keith Hennessey, formerly of the Bush43 White House, “disagree[s] with President Trump on every aspect of this.” Most of the claims are that this breaks from a long-standing tradition. But for how long? Pres. George H.W. Bush blamed Fed chair Alan Greenspan for his electoral loss in 1992, a theme that his administration began as early as 1989. Pres. Ronald Reagan in 1981 told a group of supporters, “The Fed is independent, but they’re hurting us.” Perhaps the most famous act, done more privately, was when LBJ shoved then Fed chair William McChesney Martin around a room, shouting at him, “Martin, my boys are dying in Vietnam, and you won’t print the money I need.”

This reticence of presidents to talk about the Fed, then, is fairly recent history, started by Bill Clinton’s Treasury secretaries Robert Rubin and Larry Summers. Greenspan having enough credibility to be called a maestro probably stayed the hand of Bush43’s staff (you might argue they needed to jawbone rates higher) and the Obama White House used breakfasts to persuade Bernanke and Yellen in private more than with public statements.

Hennessey’s article does make a very strong point though, and is the reason why we should find Trump’s statement unsurprising. Elected officials like economic expansions because incumbents are rewarded for a good economy (even if they’ve done nothing to cause it) and so rising interest rates tend to be characterized as “taking away the punch bowl just as the party gets started.” That is, elected officials always have an inflationary bias, regardless of party. Since the Fed typically has leaders with less of an inflationary bias, with more frequent spikes. (To give my bona fides and perhaps my biases, I have been writing on this topic professionally for 35 years.)

We could have a fine argument about whether the Fed is going too fast or too slow, but that’s not my point. It’s only that jawboning the Fed is an old tool in the economic policy toolbox and those acting like this is taboo have forgotten their history.

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