The Continued Collision Between Trump and the Fed
As I noted before, the Fed and the Trump admin are on a collision course. More evidence:
Fed minutes show many officials think they may need to accelerate rate hikes if fiscal raises demand over sustainable levels
— Sam Fleming (FT) (@Sam1Fleming) January 4, 2017
The Fed’s argument is that the unemployment rate is low enough that it is at the natural rate of employment which doesn’t cause wage-push inflation. As of December, that was 4.7%. (There are tons of problems with this, but we’ll ignore most of them, what matters is what the Fed thinks.)
I am old enough to remember when an unemployment rate of 5% was considered a scandal, but no matter.
The fact is that the people who elected Trump aren’t feeling good. To make them feel good Trump is going to have get the official unemployment rate lower than it is now, at least under 4%, and hopefully to 3% or lower and hold it there for some time, at least 2 or 3 years.
This stuff takes time to ripple thru the economy, and it takes time for a tight labor market to push employers both to raise wages and to hire people who they consider marginal.
If the Federal Reserve raises rates if Trump’s policies (“fiscal”, in the above) start to work, they will be making sure he can’t deliver to his constituency.
This is a direct collision course.
Now let me say something simple. The Federal Reserve, for over 30 years, has deliberately crushed wages. This was policy. Policy.
The idea that the Federal Reserve should be able to sandbag the policy (“fiscal”) of elected representatives has always been anti-democratic, and bogus. They work very closely to make sure the rich get richer, to bail out banks and ensure their profits, but despite “full employment” supposedly being part of their charter, they have defined full employment to mean “employment pressure which doesn’t lead to general increases in wages faster than inflation”.
That is, they have deliberately set out to create stagnation and decline of general wages, while deliberately also ensuring that the rich get richer.
That’s what the Federal Reserve does in practice, and has since the early 80s.
And that’s why, as with many other targets of Trump, I have no intention of defending the Federal Reserve. Yes, Trump is bad, etc… but the Federal Reserve needs to be broken to the will of government, and thus to democracy.
Since none of the “non bad” or “not so bad” presidents did it, it will fall to Trump to do it. This will probably be the worst way to do something necessary, but so be it; none of the reasonable people will do it, so it will be done by someone unreasonable (if Trump does it, not a sure thing.)
Along with breaking the intelligence community (which could end us in an even worse place, but also falls into “needs to be done”), Trump may well wind up being the most transformative President since Reagan, or even FDR.
This is what happens when actions which are necessary are not taken by “reasonable” people. They wind up being done by unreasonable people, and those unreasonable people may not be unreasonable in the way you like.
Keep an eye on this: if the Fed doesn’t blink and Trump doesn’t break them, he’s probably a one-termer.
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