The US and Turkey
By Scott Sumner
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.)