President Donald J. Trump has shown no compunction about attacking independent institutions. Targets of his Twitter rage include Congress, the FBI, the Justice Department, the intelligence community, the Federal judiciary, and the news media.
So it was hardly a surprise when he took on one of the most powerful independent agencies in the U.S. government on July 20: the Federal Reserve. In doing so, he broke with a twenty-five-year-old rule observed by Democratic and Republican presidents alike to avoid public comments about Fed policy. And for good measure, Trump tweeted his displeasure with the Fed in case it didn't get the message. Senior Fed officials have been bracing for quite some time for a Trump attack: their only question was when. That's because the central bank has embarked on a path of steady interest rate increases to keep a hyper-stimulated economy from overheating and causing an outbreak of inflation. At its August 1 meeting, the Fed signaled its intent to keep raising rates.
For Trump, the Fed's policy course is looking increasingly perilous in 2020, when he would be up for reelection. Today, he is benefitting from a Goldilocks economy that is about as good as it can get. Growth is moderate, unemployment is extraordinarily low, and inflation is tame.
That virtuous cycle is unlikely to last much longer, according to most economic forecasts. The Fed is likely to accelerate the pace of its hikes to offset the stimulative effect of the $1.5 trillion tax cut and $300 billion spending increase Congress passed last fall. Meanwhile, the yield curve has been flattening and is close to inverting, a strong indicator of a coming recession.
All that fiscal injection "is going to hit the economy in a big way this year and next year," former Fed Chairman Ben Bernanke observed during a policy discussion in June, just weeks before the government reported that GDP rose 4.1 percent in the second quarter, the fastest growth since 2014. "And then in 2020, Wile E. Coyote is going to go off the cliff," he said, referring to the Road Runner's nemesis in the cartoon series. As predicted, Trump seized the opportunity to bash the Fed when asked in an interview with CNBC about interest rate policy. He began by praising Chairman Jerome "Jay" Powell, whom Trump appointed to succeed Janet Yellen, as "a very good man." Then he blasted the Fed's rate increases. "I'm not thrilled because we go up and every time you go up, they want to raise rates again...