Carney: Powell’s Remarks Show That Trump Won the Monetary Policy Fight

Federal Reserve Chairman Jerome Powell on Thursday affirmed his commitment to holding interest rates low for the foreseeable future, saying that even if unemployment falls back to historical low levels that would not be a reason to raise rates unless high inflation threatened.

In a Q&A session hosted by Princeton University, where Powell got his undergraduate degree, Powell responded to a question about whether he would support a rate increase if the unemployment rate fell below levels that economists once considered a warning sign for an overheating economy.

“That wouldn’t be a reason to raise interest rates, unless we start to see inflation or other imbalances that would threaten the achievement of our mandate,” he said, referencing the Fed’s dual mandate of achieving maximum employment and price stability.

If this sounds familiar, it is because it is basically the monetary policy advocated by Donald Trump in the years when he was regularly criticizing the Fed for raising rates.

“The USA should always be paying the lowest rate. No Inflation!” Trump tweeted in September of 2019. “It is only the naïveté of Jay Powell and the Federal Reserve that doesn’t allow us to do what other countries are already doing.”

Trump was widely lambasted for publicly addressing and criticizing Fed policy. Ever since Clinton, most presidents had kept any disagreements with the Fed away from the public. Trump returned to the earlier practice of presidents, such as Ronald Reagan, who felt free to speak up on monetary policy.

Last year, the Fed undertook a review of its strategies for achieving its goals and its conduct of monetary policy. The review followed several years of inflation coming in below the Fed’s target and a series of rate hikes and a drawdown of bond purchases that now look ill-advised. Following the review, the Fed changed its approach so that it would let inflation run higher than the two percent target for some time so that the long term average would be at the target.

In its December policy statement, the Fed’s Federal Open Market Committee said it would keep an accommodative stance until it sees “substantial further progress” towards its dual goals. If he had the time to take notice, the president probably smiled.

Trump may be headed out of the White House but Trumpian monetary policy will be with us for years to come.