The president, wearing his trademark glower, stares across his Oval Office desk at the central banker. He warns that a recession would have dire political consequences. “The liquidity problem,” he adds, is “just bullshit.”
President Donald Trump has mostly spared the Federal Reserve from the tumult he has inflicted on other institutions in Washington during the early days of his presidency.
He did dip his toes into central banking policy last month though, telling the WSJ in an interview that now that he's president and can be honest, he actually prefers low interest rates. And, oh yeah, he mentioned, he is also willing to consider re-appointing Fed Chair Janet Yellen when her term is up in 2018. Trump’s sudden evolution to favoring low rates after attacking them on the campaign should not be surprising, nor should the possibility of a re-appointment for Yellen if she follows her dovish policy instincts in the coming year and a half.
No president with majorities in Congress would want to see rates rising as midterm elections neared — not to mention before his own re-election campaign down the line. Few things endanger incumbents like the economic slowdowns that invariably follow rate hikes.
This sort of public politicking by Trump will certainly lead to alarm among Fed officials and non-Zero Hedge contributing economists who preach the importance of policy independence, but presidents always seek to influence the Fed. It does seem likely, though, that Trump will do so with little regard for the traditional norms and decorum that have limited direct policy meddling in the past.
This would take him down a similar path to Richard Nixon, whose administration seems to be emerging as the easiest (laziest) historical precedent for Trump’s - and not just because of the impetuous, fulminating men at their centers. Nixon was keenly aware of how rising interest rates can impact the ballot box, and always blamed his close election loss to John F. Kennedy (amen) in part on a cycle of interest rate tightening that triggered a recession in the first few months of 1960.
As a result, he left little to chance at the Fed when he became president, installing GOP loyalist Arthur Burns as its chair and then subjecting Burns to his full range of fulmination, micro-managing and threatening to keep rates low ahead of his re-election campaign. The central banking policy tensions of Nixon’s times parallel those of the Fed today, as well, with Fed officials deciding between nurturing a growing - if unspectacular - economy, or giving way to worries that money is too easy and liquidity needs to be pulled from the financial system.
Nixon, as his White Hose tapes reveal, considered that liquidity problem to be “just bullshit.” Absent inflation showing up at the gas pump or in the food aisles, Trump will agree.
And there is more than the purely political calculus to consider.
Like so many of his countrymen, Trump is a real estate addict at heart and one day (hopefully soon, for all of our sake) will be able to capitalize on his Chiefdom in hard assets and big deals during his post-presidency. Now that the Goldman guys will take his calls, turning off the easy money spigot any time soon probably sounds like a bad idea to the President.
Robb Soukup is a freelance journalist who previously covered the banking sector and The Fed for S&P Global Market Intelligence.