The horizon is not so far as we can see, but as far as we can imagine

Trump’s Continued Collision with the Federal Reserve

Back around Trump’s election, I said that there would be a collision between him and the Federal Reserve. At the time, it was run by Yellen.

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 four percent, and hopefully to three percent or lower and hold it there for some time, at least two or three years.

This stuff takes time to ripple through the economy, and it takes time for a tight labor market to push employers to both raise wages and to hire people who they consider marginal.

If the Federal Reserve raises rates if/when 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.

So, Trump hired Powell, and Powell is doing what Yellen would have done. Trump, on October 11th, said that he wouldn’t fire Powell, but was only disappointed.

It’s unclear whether or not Trump can fire Powell, however he can fire all other members of the Federal Reserve board for non-performance of duties. The case isn’t as clear as back in, say, 2009, but the economy still isn’t good for large parts of America, a case can certainly be made.

More to the point, Trump should.

Yes, Trump is the source of all evil and anything and everything he does should be opposed, I know, but bear with me: The Federal Reserve should not be insulated from pressure from elected officials.

I know that orthodoxy says it should, but the fact is that, since 1979, the Federal Reserve has raised interest rates whenever it looked like wages were going to rise faster than inflation. The Federal Reserve, in other words, has crushed wages.

This is bad. It is at the heart of why we have the rise of the right, and so many other problems. Vast inequality, in democracies, always leads to political instability, and in democracies the purpose of the economy should be to create a good life for everyone, anyway.

Trump ain’t a good guy, but wages aren’t increasing for ordinary people. That means that whatever the nominal unemployment rate is, the US isn’t actually at full employment. If it was, there would be rising wages. It is that simple. To raise interest rates before there are even significant wage increases is malpractice, even by the usual standards of monetary policy–and the usual standards are already malpractice.

Just because one despises Trump, one should not allow the major part of economic management be run by people who despise ordinary people receiving wage increases, or, indeed, by “independent bodies.” Democracy means elected officials having control over real policy.

So, I hope Trump fires a bunch of Federal reserve members, I hope it goes to the Supreme Court, and I hope that those firings are upheld.

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Open Thread


Open Thread


  1. Hugh

    Since 2008, low interest rates were about keeping stock markets juiced by funneling essentially free money to the rich. That’s why Trump likes them. They’re oxycontin for the rich.

    We live in distorted times. What the unemployment rate measures is not unemployment but job seeking. So a low unemployment rate does not translate into full employment. Additionally, since 2008, pretty much all the jobs created have been crappy. Even if we were at something like full employment, in an ocean of shit jobs, there could well be little or no upward pressure on wages. A lack of such pressure has certainly been the case so far.

  2. Hvd

    Nothing would do more to improve wages than crushing Wall Street. Businesses might then be inclined to invest in productive activity rather than seeking executive compensation through stock options. To the extent that raising interest handcuffs the great casino it would seem to thereby benefit workers.

  3. Neo

    The FED has always been about the protection of wealth. It’s the price paid by the American people for JP Morgan stepping in to prevent the collapse of the economy after the Panic of 1907. What has changed is that there is less influence over the FED each year, until those who benefit from FED actions are completely in charge of the economy with no interference from any governmental control. How else could they have gotten away with the Great Recession with only one foreign-born functionary going to prison for economic malfeasance?

  4. Effem

    Even if we change monetary policy to be less tight late-cycle, there is zero guarantee that wages will rise faster than inflation. The opposite could easily happen. Politicians should stay out of monetary policy.

  5. Herman


    Yes there is more to wages than the unemployment rate. The elephant in the room is the decline of unions. Most people forget that manufacturing jobs were only “good jobs” because they were heavily unionized. Prior to unionization they were often dirty, dangerous and low-paying. I don’t think there has ever been a successful model of somewhat egalitarian capitalism without strong labor unions outside of perhaps some small city-states, petro-states or other outliers.

    This is where I have to admit that the Democrats are the lesser of two evils. Sure, the Democrats don’t really stick out their necks to help labor and usually take them for granted, using unions for money and troops during elections, but this neglect is better than the GOP’s campaign to crush whatever is left of organized labor.

    Labor’s power is heavily determined by the legal environment and currently labor law is very pro-employer. Organizing is very difficult. Trump’s judicial appointments will all be reliably anti-labor and you can expect more decisions like Janus in the future, not to mention the right-to-work laws the Republicans have been passing at the state level. If you want wages to increase and conditions for workers to improve you have to make it easier for Americans to organize and join unions. That won’t happen with Republicans in power.

    That being said, I agree with Ian that the Federal Reserve has deliberately crushed wages and that the Fed should not be beyond the power of elected officials. The belief in independent bodies insulated from politics is a technocratic, anti-democratic one and something that liberals need to shed if they are ever going to win over the mass of working people again.

  6. Will

    Herman: I’d like to send you a hat tip for your comment. Not that I wouldn’t quibble about a few details with you, but a lot to agree with there from my POV.

    BUT, I would caution anyone making generalizations about the degree to which political parties are evil wrt things generally good for the populace. The sands are shifting I believe under the feet of these parties. If you squint your eyes you can see the form of these parties as they shape shift.

    Just remember that Trump didn’t invent these issues he was merely the first (Republican) to say he would approach them from a populist POV. That was what the rebellion in the Republican Party was all about. We’ve no idea to what extent the parties will co-opt these issues over the long run but at this point there is more acceptance by the Republicans than by the Democrats. Whether this remains the case going forward is anyone’s guess but if things continue to morph in the same direction you may see some of your generalizations flip sides.


  7. Ché Pasa

    There may be an error in thinking Trump’s war with the Fed has anything at all to do with the Fed’s program of suppressing wage growth. Rather, it’s more likely he and his regime see wages as intolerably high business expenses.

    Any replaced Fed board members would still be likely to follow the program of keeping wages down no matter what, though they might go about it somewhat less directly.

  8. NR

    Ian, why are you talking like Trump cares about wages for most Americans? It’s been blindingly obvious for a long time now that he doesn’t.

  9. Hugh

    Herman, I agree about unions. Outsourcing jobs to China also helps keep wages depressed. And immigration, both legal and illegal. Something like 17% of the US workforce is foreign-born. 1979-2008, I agree with Ian that the Fed waged a war on workers’ wages.

  10. Stirling Newberry

    Trump’s the voting block is rich people, and you can only get very little money from poor people to make other poor people less poor. Trump is on a collision course with Trump.

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