Is The US Fed Batting For Hillary? Trump Thinks So, And Fed Policies Suck

One of the most significant things Donald Trump said in his presidential debate yesterday (26 September) with Hillary Clinton was the US Fed’s flawed interest rate policy. The Fed under Janet Yellen, said Trump, was “doing political things” to keep rates low. He added: “When they raise rates, you’re going to see some very bad things happen…”.

What Trump was essentially hinting at was that near zero-interest rates were keeping asset prices up, “creating a big, fat, ugly bubble.” This means when rates are actually raised, the markets could crash, creating a new downward pressure on the economy. The US could tip into recession.

While the Fed has denied it is playing politics to create an artificial sense of strong growth, it is worth understanding the politics of Trump’s attack on the Fed, and the essential truth underlying it.

Trump is saying in coded language that Yellen is deliberately keeping rates low, even though they could have been raised them at the last Fed meeting on 20-21 September. This will help the Democratic candidate, who will obviously pay a price if the markets crash or a recession looms. Trump would gain from a crash, for a crash would be seen as a failure of Obamanomics – something Trump has been railing against. Clinton can’t afford a declining economy to tilt the balance against her in a close race.

But there is sound economic argument to Trump’s attack too.

In recent weeks, many bankers have begun criticising zero interest rates, both in the US and Europe. In the US, Jamie Dimon, CEO of JP Morgan, urged the Fed to raise rates for they have been kept too low for too long. He is quoted by Bloomberg as saying: “The Fed has to maintain credibility. I think it’s time to raise rates. Normality is a good thing, not a bad thing. The return to normal is a good thing.”

In Europe, Deutsche Bank CEO John Cryan said last month that “monetary policy is now running counter to the aims of strengthening the economy and making the European banking system safer.” He warned of “fatal consequences“ for savers and pensions plans.

It is difficult to see how banks can make money on zero or negative interest rates, when savers lose out on earnings and borrowers shy away from investing due to a weak economy.

But barring a single rate hike by the Fed earlier this year, no central bank - including the European Central Bank and the Bank of Japan – has dared to bring rates to clearly positive territory due to fears of pushing their economies into recession. With the cost of money near zero, only speculators have benefited, since zero-cost money has gone into assets like stocks. Wall Street buccaneering ways caused the crash of 2008; but Wall Street is also the greatest beneficiary of that crash which pushed rates so law that only speculators can benefit from cheap money.

Many economists have questioned the wisdom of keeping rates so low when the policy has not yielded significant benefits in terms of higher growth or achieved targeted inflation rate. What was useful to stave off a depression in 2008 has now become a curse for savers.

Trump will have a mess on his hands if rates start being raised after (and if) he is elected; hence his sharp attack on the Fed. If a crash has to happen, it would help him if it happens before the November election. But he is right on fundamentals too.