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The Fed would do a big favor for Trump by raising interest rates

Dr. Peter Morici
web posted March 20, 2017

The Federal Reserve would do President Donald Trump a favor by raising interest rates at its policy-making meeting this week — or at least signaling a clear intention to move in May.

Inflation is close to the Fed’s 2% target and globally pressures are even stronger. With unemployment below 5%, boosting growth and creating better paying jobs than were accomplished during the Obama era will require radical changes in federal policy.

Obama increased taxes on small businesses and investors, imposed burdensome regulations and worked against U.S.-based manufacturers by appeasing China on trade and its inexpensive currency. He let the nation’s transportation systems and schools fall into terrible disrepair, and forced states to divert money into health-care programs made more expensive by the Affordable Care Act.

Consumers have been spending briskly for several years but business investment in both equipment and research and development has been nonplus. Too much of what Americans buy is imported, U.S. exports are too expensive and despite Trump’s jawboning, American manufacturers still will be inclined to expand in Mexico and Asia without radical shifts in policy.

In part, the Fed’s easy monetary also enabled Obama’s antigrowth policies — low rates helped consumers borrow more to buy cars, enjoy restaurant meals and the like — but not without some negative consequences.

Keeping interest rates near zero for eight years pushed fixed-income investors into riskier bonds and stocks — pushing prices for both higher. Cheap mortgages pushed up commercial real estate and agricultural land values and permitted home prices to recover to pre-recession levels, but those may prove unsustainable in frothier markets when mortgage rates move up again.

Too many factories are now shuttered or have grown obsolete. The lack of R&D, which is primarily financed by manufacturing profits, has curtailed the kind of innovation and more rapid productivity improvements that powered 3.5% annual growth during the Reagan-Clinton years.

Trump won the White House by promising to repeal and replace ObamaCare, rebuild infrastructure, reduce tax rates, roll back regulations and finally get tough with China on currency and other issues. However, he will face tough opposition from Democrats and factions within his own party.

On health care, GOP proposals to send states block grants to shape their own Medicaid programs will encounter resistance from Democratic and some Republican governors who are reluctant to reduce benefits or raise taxes to cope with rising health-care costs. Similarly, many GOP members of Congress wish to replace ACA health-insurance subsidies for low and middle income families with less expensive tax credits but balk at regulating prices, which will prove necessary to get the job done.

Fiscal conservatives will oppose borrowing to modernize roads and the like. Ways and Means Chairman Kevin Brady’s plan to cut corporate-tax rates hinges on imposing the corporate levy on imports — while exempting exports — and that faces tough opposition from retailers like Wal-Mart.

Just as the Obama administration was required to post and take public comment before issuing new regulations — and then endure legal challenges from business — the Trump administration will have to retrace those same processes and face litigation from environmental groups, labor unions and community activists to repeal those same mandates.

Finally, Trump has failed to adequately articulate his strategy for his toughest campaign promise to fulfill — radically confronting China, which accounts for about 60% of the $500 billion trade deficit, on its cheap currency and other mercantilist policies.

All this portends heavy lifting even for the world champion of deal-makers, and it will take several years to accomplish and permanently raise economic growth above 3%.

By failing to raise rates quickly enough, the Fed could buy Trump time but more than likely, it would also enable him to put off until 2018 — and then never — what must be tackled now if it is to ever be done.

Presidents accomplish most of their good work during their first few years in office. It would be better for the Fed not to afford him the luxury of time to fight through the necessary reforms lest he never get those done.

By raising interest rates modestly this week and adjusting those to more normal levels through the balance of this year and next, the Fed would end the monetary-policy promiscuity that permitted Obama to preside over such a mediocre economy and compel Trump to deliver on his promises. ESR

Peter Morici is an economist and business professor at the University of Maryland, and a national columnist.




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