Carney: The Debate Over Fed Policy is Over. Trump Won.

The gap between President Donald Trump and the Federal Reserve chairman he appointed has narrowed considerably.

A year ago, Powell and his fellow officials at the Federal Reserve were in the midst of a monetary poilicy they described as “normalization” and which required gradual rate hikes. The Fed hiked rates four times in 2018, provoking Trump to describe Powell as “crazy” and “out of control.”

This was described, falsely, as an unprecedented breach of decorum by Trump. (Ronald Reagan had been sharply critical of the Fed and its then-chairman Paul Volcker the early 1980s.) Perhaps more importantly, Trump view that monetary policy was too tight was derided as wrong.

“Economists surveyed by The Washington Post overwhelmingly think Powell is right to raise the benchmark U.S. interest rate Wednesday to a range of 2.25 to 2.5 percent,” Heather Long of the Washington Post wrote. “Twenty-seven out of the 32 surveyed said the economy is strong enough to handle a more ‘normal’ interest rate that is closer to 3 percent.”

On Wednesday, the Fed announced its third rate cut of the year. The Fed’s target is now 1.50 percent to 1.75 percent–around half of what all those economists overwhelmingly said was ‘normal.’ Trump won.

Powell said believes the central has provided the appropriate amount of monetary accommodation based on where it sees the economy’s likely path. But he also provided reassurance that the Fed would not resume hiking rates unless there was a significant uptick in inflation.

In other words, the normalization era is over. No longer will the Fed raise rates just because it thinks normal rates should be higher. It will only hike to stave off inflation–and the risk of higher inflation is very low right now.

So hikes are off the table. But further cuts are only on hold. If the economy weakens, the Fed will return to cutting. So the Fed is more or less writing a one-way insurance policy on the economy: if things go well, rates will stay where they are. If the economy slumps, we’ll get more cuts.

There gap between Trump and the Fed has not completely closed, of course. The Fed sees the normal pace of growth for the U.S. economy at about 1.8 percent, lower than it has been any time this year. The president thinks the economy could grow much faster–especially if the Fed was willing to cut more.

It is worth noting that Trump did not attack the Fed or Powell on twitter following the central banks’ interest rate decision. Maybe some of the tension has eased along with the interest rate.