Donald Trump should start attacking the Fed soon – 01/08/2024 – Paul Krugman

Interest rates should start to fall. Maybe not today, and maybe not tomorrow, but soon, and for the rest of this year (at least).

Why? Because there are very good reasons for the Federal Reserve, which controls short-term interest rates — that’s how it does monetary policy — to start reversing the sharp rate increases it carried out starting in March 2022.

There is fierce debate over whether these rate increases were excessive, which I will not discuss here. Regardless of what you think about past policy, the case for cuts in the future is very strong, and I hope the Fed acts on that case.

What I don’t know is whether the Fed is prepared for the political storm it’s about to face, and whether it will resist the pressure to keep rates too high for too long.

Because it’s a safe prediction that Donald Trump and his supporters will complain that the upcoming rate cuts are part of a “deep state” conspiracy to re-elect President Joe Biden.

Let’s talk first about the economy, which should — but might not — be the only thing guiding the Fed’s decisions.

The Fed raised rates in an attempt to curb inflation, which was high at the time — its preferred measure of underlying inflation was well above the 2% target.

The United States central bank continued raising rates until mid-2023, trying to cool the economy and ensure inflation slows.

It turns out that the economy has not yet cooled down much, at least according to the usual indicators; the unemployment rate remains near a 50-year low. But inflation plummeted.

Over the past six months, the basic personal consumption expenditures deflator — try saying that five times fast — has risen at an annual rate of just 1.9%, below the Fed’s target, and more complex measures are closer to 2%.

Basically, the war on inflation is more or less over, and we have won.

So why keep interest rates so high? Right now, the job market looks a lot like it did on the eve of the pandemic, with unemployment and other market-heating measures like the worker attrition rate similar to what they were at the end of 2019.

The Fed is projecting higher inflation next year than in 2019, but only slightly higher.

At that time, however, the federal funds rate — the interest rate controlled by the Fed — was 1.75%. Now it is at 5.5%. It’s really hard to find a good reason why it remains so high.

It’s true that high rates haven’t caused a recession — yet. But there are signs of economic weakness, and the Fed should try to get ahead of it. So it’s time to start cutting rates.

But rate cuts will have political implications. They will be good for Biden, although not for exactly the reasons you might think.

I don’t know what the unemployment rate or economic growth rate will be in November, but since monetary policy works with a lag, what the Fed does in the coming months won’t have much effect on these numbers.

However, Biden is already presiding over a very good economy by normal standards, with solid job growth and falling inflation. What he needs is for more Americans to accept the good news. And the Fed’s rate cuts will help with that.

They will signal to the public that inflation is truly under control; they will lead, all other things being equal, to higher stock prices and lower mortgage rates.

So we can expect cries from Trump and his allies that politics, not economics, are driving the next rate cuts — even though Trump has nominated Jerome Powell as Fed chairman.

Why do we know this will happen? Partly because paranoia is the normal condition of “Magaworld” [“Maga” é a sigla do slogan da campanha eleitoral de Trump, “Make America Great Again”]: She sees sinister conspiracies everywhere.

Furthermore, Trump and his allies constantly engage in projection, assuming that their opponents are doing or will do what they themselves would do or have done, such as using the Justice Department for Trump’s political purposes.

And when it comes to interest rate policy, Trump has a history of doing exactly what I’m sure he’ll accuse Biden of doing: trying to manipulate the Fed.

Since Richard Nixon pressured the Fed to keep rates low in 1972, possibly helping to set the stage for the stagflation that followed, it has been traditional for the White House to respect the Fed’s independence.

But in 2019, Trump attacked Powell and his colleagues as “airheads” and demanded that they cut interest rates to “ZERO, or lower.”

So we know that Trumpist attacks on the Fed for cutting interest rates are coming. What we don’t know is how the Fed will react.

In a recent conversation with me about the economy, my colleague Peter Coy suggested that the Fed may be inhibited from cutting rates because it will fear accusations from Trump that it is trying to help Biden.

I hope Fed officials understand that they will be betraying their responsibilities if they allow themselves to be intimidated in this way. And I hope the warning takes effect. The Maga attacks on the Fed are coming; they should be treated like the bad faith bullies that they are.

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