Federal Reserve

Federal Reserve Cuts Interest Rates After Trump Calls for Zero Interest Rates

The rate cut is too little, too late for Trump, who says after the move that his Fed chair lacks "guts, sense, vision"


Last week, President Donald Trump tweeted that the "boneheads" at the Federal Reserve should reduce the federal funds interest rate that the Fed tries to control to zero, or even less, in an attempt to goose the economy.

Today, in what is surely a complete coincidence, given the Federal Reserve's much-vaunted political independence, the Federal Reserve Board announced a quarter percentage point cut in their target interest rate, getting it down to the 1.75-2 percent range. This is the second cut since July and they hint there might be another one before the year is over.

There better be, in the opinion of the president, who reacted to the news with another tweet that Federal Reserve Chief Jerome Powell (a Trump appointee!) and his institution "Fail Again. No "guts," no sense, no vision!"

Scott Sumner, a monetary economist of the "market monetarism" school, reacted via email last week to Trump's original tweet with the observation that "President Trump needs to be careful what he asks for," given that, from Sumner's perspective, "Near-zero interest rates can reflect an expansionary monetary policy, but more often they reflect very weak growth in nominal spending, caused by an inappropriately tight policy over a number of years. That has certainly been the case in Japan and the Eurozone."

"Trump presumably favors low rates created by easy money, but he'd be better off in stating his policy preferences in terms of inflation or nominal GDP growth," Sumner believes. Nonetheless, for his own reasons, Sumner declared on his blog today both that he considers Fed actions like this a feckless "yawn" (he thinks Fed moves have less influence than they used to in the current environment) and that they'd have been better off cutting a half a percent.

CNBC muses on a sign in the markets of Federal Reserve powerlessness over the interest rate it tries to control even as this move is announced:

It's been a rough week in the overnight funding market, where interest rates temporarily spiked to as high as 10% for some transactions Monday and Tuesday…

The odd spike in rates forced the Fed to jump in with money market operations aimed at reining them in, and after the second operation Wednesday morning, it seemed to have calmed the market. The Fed announced a third operation for Thursday morning.

In a rare move, the Fed's own benchmark fed funds target rate rose to 2.3% on Tuesday, above the target range set when it cut rates at its last meeting in July…

"This just doesn't look good. You set your target. You're the all-powerful Fed. You're supposed to control it and you can't on Fed day. It looks bad. This has been a tough run for Powell," said Michael Schumacher, director, rate strategy, at Wells Fargo….

Ron Paul, the former congressman and presidential candidate and sparkplug of modern Federal Reserve skepticism, thinks that monetary policy attempts to keep goosing the economy will likely lead to Trump's desire for zero or negative interest rates, and that this will lead to an unpredictable but dangerous asset price bubble burst.

As Barron's notes, a return to the immediate post-2008-financial-crisis bond-buying policies (remember "quantitative easing"?) on the part of the Fed also likely looms. Jeffrey Hummel wrote in Reason back in 2014 on the dangers of the Federal Reserve becoming such a huge holder of financial assets.

NEXT: Trump's Bizarre Meeting With Corey Lewandowski Suggests a Consciousness of Guilt

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  1. Interest rates should be determined by the market.

    Instead Reason seems to just argue on whether this cut should have been or how big it should have been.

    1. Look, we’ve all agreed we’re whores, we’re just haggling price here.

    2. I don’t know- they quote a bunch of people (Trump, Sumner) who have opinions, but they do not specifically argue for one. Indeed, the actual author’s commentary is left to heap scorn on people calling for cuts/raises one way or the other, and to point out that there are negatives associated with cutting too much.

    3. “Interest rates should be determined by the market”.

      To a large extent they are. The fed follows treasuries, they do not lead. The yield curve and low interest rates around the world factor in more than trumps bluster. In this sense their decisions are “independent” if not somewhat forced. Not saying they’re right or wrong, but that’s what they’re doing. The “who’s calling the shots” narrative is just more divisive click bait.

      1. Yup, correct. The Fed should be a market follower, facilitating the market, setting a low interest rate as a target, etc. Best if there were no Fed, but as long as we have one it should not be setting economic policy whatsoever.

        What Trump wants is an activist Fed, a political Fed.

  2. One of the major reasons for the cut per the thread was low inflation signals in the data. This despite Boehm telling everybody tariffs are taxes on everybody… yet nobody has ever found the signal in the inflation data.

    1. Inflation is not the same as the inter-bank interest rate. They are indirectly related of course, but a zero percent interest rate is likely to lead to MORE inflation. NOT zero inflation.

      In order to get to zero percent inflation, you need to get government siphoning money OUT of the system to overcome a market’s positive money creation. The natural market rate for inflation is not zero, but a small but positive number. Even in an ultra-strict gold specie standard with Rothbard Cops with billy clubs on every corner, some damned fool is still going to end up mining some gold and increasing the money supply. Damn those free market miners!

      The goal should not be zero inflation, the goal should be to let inflation reach an equilibrium via a free market.

      In either case, let me reiterate that the rate of inflation is NOT the same as the interest rate. Zero interest rates will tend to lead to higher inflation.

  3. You need to be careful when you ask the Wizard to perform miracles – he can do the “got your nose” and the “pull my finger” tricks, but asking for more risks exposing the fact that he really doesn’t have any powers at all. Despite all the mystical rituals and all the indecipherable incantations and all the dead chickens, the Wizard is a fraud.

    1. You may find this, um, amusing.

      1. Very! Thanks for sharing that.

  4. So no one in the government gives a damn that retired folks live on interest? Low interest is a bad thing for those past stroking their ego by borrowing wildly to get stuff.
    Strange thought; how about if the federal government was not involved in what interest rates are?
    Oh, wait. Deficit spending for all the vote buying goodies requires low interest rates.
    Conflict of ‘interest’ forever!

  5. Lack of vision? Or lack of nonsense?

    Zero interest rates are utter nonsense. The Fed can’t set the interest rates for banks lending. That’s a myth. The only interest rate they can set is for what the banks lend to each other. It is a very indirect way to manipulate the money supply.

    So either Trump wants to start an artificial boom just in time for the election season (something presidents have done in the past), or he really is as dumb as he sounds and doesn’t know what he’s talking about. As much as I think he’s clueless in most areas, I don’t think it’s the latter. I think he’s trying to spark a boom.

    But even so, a zero percent interest rate is still nuts. We’ve seen what happens when central banks do this. Japan does it and ended up with a recession so long one can’t even call it a recession anymore, just the new normal stagnation. They went from the country that was going to eat everyone’s lunch to a country with anemic growth.

    Usually though, a zero interest rate means inflation. Banks will seek to rid themselves of the excess reserves the Fed will pump into system. Which will create a boom just in time for the election, leading into a bust after that. Trump won’t care because he got elected, and he’ll blame the recession on the immigration.

    1. This is exactly it. Trump knows that the surest path to reelection is of course a strong economy. This pressure on the Fed is a short-term play with reelection in mind.

      It’s nothing new. Trump’s way of pressuring the Fed is just more public and grating than usual.

  6. Free stuff and free money! What a country!

  7. One of the major reasons for the cut per the thread was low inflation signals in the data. This despite Boehm telling everybody tariffs are taxes on everybody… yet nobody has ever found the signal in the inflation data.

  8. The Federal Reserve?
    WTF do we need a Federal Reserve, outside of a bunch of ass wipes trying to manipulate banking for themselves and their cronies?

Please to post comments

Comments are closed.