I see a growing number of similarities between the US and Turkey. Here’s another:
President Donald Trump’s top economic adviser urged the Federal Reserve to raise interest rates “very slowly,” ignoring the practice from preceding administrations of avoiding comments on monetary policy out of respect for the U.S. central bank’s independence. . . .
A Fed spokesman declined to comment.
Most developed-world central banks are given a degree of independence from governments so monetary policy doesn’t succumb to the whims of politicians. In emerging markets such as Turkey, the government has felt no such restraint.
This specific incident does not greatly concern me, but it’s just one of dozens of similar disturbing events that are slowly reshaping the US political system.
[As an aside, it’s important to understand that explicit rules can only go so far—implicit norms are also crucial. This is one reason why I think it was a mistake for Hillary Clinton to run for president. Throughout history, presidents and governors have used spouses to evade explicit term limits. I’m not saying that Hillary was just a stalking horse for her husband (indeed I don’t believe that was the case–she had strong views on her own.) But the precedent is now established, and if any future President tried to evade the two-term limit with this tactic, he could defer criticism by pointing to the precedent of Hillary Clinton nearly putting her husband back into the White House.]
Back to monetary policy:
“My hope is that the Fed, under its new management, understands that more people working and faster economic growth, do not cause inflation,” Larry Kudlow, director of the White House National Economic Council, told Fox Business Network on Friday, shortly before fresh data showed inflation pushing a bit above the Fed’s 2 percent target. . . .
“Our program is, we’re expanding the economy’s potential to grow,” said Kudlow, repeating the White House’s line that the tax cuts will deliver lasting supply-side benefits to the economy. “That’s the new approach. That’s the new structures, that’s the new technology that we’re doing, and therefore that cannot be inflationary,” he said.
It’s true that economic growth has picked up a bit, and also that economic growth is not inflationary. On that point the supply-siders are right and the Keynesians are wrong. But faster growth also raises the equilibrium interest rate, and hence it is entirely appropriate that the Fed raise its interest rate target. How fast they should do so is a difficult question. Just today, the core PCE inflation rate hit 2% (for the past 12 months), which is certainly not evidence that money is too tight, especially given that the other side of the dual mandate (employment) is also quite strong.
I’d suggest that Kudlow focus on providing the President with the names of more good people to appoint to the Fed (so far they seem to have done well with appointments) and once they’ve put those good people in charge and given them a mandate, avoid second guessing policy unless it is obviously off course. It certainly is not “obviously off course” right now.
PS. I can’t resist one last comment on Hillary. If the Dems had nominated Joe Biden in 2016 they’d be on the verge of nominating the 6th liberal to the Supreme Court. Instead there may soon be 6 conservatives (once 85-year old Ginsberg retires.)
READER COMMENTS
Michael Sandifer
Jun 30 2018 at 3:42am
It’s also not clear that unemployment is low, in the sense of potential. Given low productivity growth, it could continue to go lower than many economists thought likely a year ago. If unemployment goes down another .5-to-1%, will that mean monetary policy was too tight? And what if we started seeing a rise in investment and productivity in the process?
I’m not convinced a short period of above 2% inflation is a bad thing. I wouldn’t mind seeing 3%, permanently. I think it’s an experiment worth running, as long as the Fed doesn’t slam on the brakes at some point.
Jon Murphy
Jun 30 2018 at 7:50am
Regarding your point on informal norms: wasn’t there also something of a precedent for allowing the Fed chair more than one term? I seem to vaguely remember some discussion on this point (can’t remember where) when Trump did not nominate Yellen again and went for Powell.
Chris
Jun 30 2018 at 8:20am
Your “P.S.” makes several unjustified assumptions and one omission that is equally unproductive.
First, your hypothetical simply assumes Biden as the nominee, omitting the actual winning of the nomination. However, Biden has already proven (2x) that he is a terrible candidate. I’ll assume (challenge back if you wish) that Biden would not have dissuaded near as many challengers from entering the race as Hillary did, an so–even as standing VP–his winning the nomination was hardly foreordained.
Further, you assume Biden would have won. I agree with this, but hardly think it as certain as you make it out. After all, most people were pretty sure Hillary was going to win the day before the election, so some caution here seems advisable.
Finally, you assume Kennedy was going to retire at this point, regardless of which party controlled the White House. I can’t say you’re wrong, for sure, but I can’t think of an argument based on the available evidence (who nominated him, how he voted in Bush v. Gore, how he voted generally) that would support this claim.
A President Biden may indeed be presented an opening right now, but it likely would’ve been for Ginsburg’s seat, not Kennedy’s.
Scott Sumner
Jun 30 2018 at 2:14pm
Michael, I’d rather not “experiment” with the economy. (We tried high inflation in the 1960s.) The Fed should pick a policy rule, and stick with it.
Jon, Yes, but I don’t see that norm as being quite as important.
Chris, My point was that the Dems would have been smart to nominate Biden, not that he would have won the nomination. I agree that my other claims were speculative.
Alan Goldhammer
Jun 30 2018 at 3:00pm
Is this the same Larry Kudlow who just yesterday said that the US deficit is coming down rapidly?
Michael Sandifer
Jun 30 2018 at 10:48pm
Scott,
3% annual inflation is not high, in my estimation. If the inflation rate had only gone up by 1%, permanently in the late 60s and early 70s, the situation would have been far better than it turned out to be, to say the least.
Also, this would be an experiment with disproportionate risk/reward in favor of reward, assuming the Fed didn’t scare itself into causing a recession at some point.
BC
Jul 1 2018 at 12:21am
I will not resist making a Hillary comment either. When Bill Clinton first ran for President, the Clintons kept saying that America was getting two presidents for the price of one. So, according to that, Hillary has already exhausted her two-term limit.
bill
Jul 1 2018 at 9:48am
We need a Constitutional Amendment that limits the spouses, children and siblings of former Presidents and Senators, maybe even House reps, from taking office. And term limits. Even long term limits would be helpful. How about 18 year limits for the Supreme Court so that each President would get to nominate at least two new SCOTUS justices?
Larry
Jul 2 2018 at 1:54am
As long as the Dems pick their candidates based on identity rather than political skills, they will be trying to run a race dragging a boulder behind them. What could go wrong?
Lorenzo from Oz
Jul 2 2018 at 8:11pm
Any Democrat would have had difficulty winning the 2016 election. The Donald underperformed the GOP House of Reps vote by 3%pts (46-49) and still won. His electoral “achievement” was winning the GOP nomination; after that he was the likely winner by being the GOP nominee.
The only time in the postwar period a Party has won the Presidency three times in a row was Reagan-Bush Snr, and that was with long economic expansions and a popular President with a nominee who was able to associate himself with said popularity and avidly did so. (Yes, Obama was popular at the end of his Presidency, but that was significantly because of who is putative replacements were). Gore could have pulled it off if he had the wit of Bush Snr, but he was too busy distancing himself from a popular President (so reminding everyone how much he was not Bill Clinton) rather than bilking the association for all it was worth. Joe Biden was somewhat placed to repeated Bush Snr’s efforts, but with the US bogged down in low level war and a very anaemic economic recovery, the odds were against it.
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