Fed may bow to Trump’s call for rate cut if inflation softens

Bloomberg

With his call for lower interest rates, President Donald Trump has weighed into a debate inside the Federal Reserve about what central bankers should do about sub-par inflation. It’s
not totally crazy to think he’ll eventually carry the day.
In advocating easier credit, Trump and senior economic adviser Larry Kudlow have harped on the paucity of inflation to justify their call for a change of course by the cen-tral bank, even with the US economy still expanding.
“The Fed should drop rates,’’ Trump told reporters after the government reported a larger-than-expected jump in payrolls for March. “They really slowed us down. There’s no inflation.’’
By highlighting weak inflation, Trump touched on a sensitive subject for Fed officials who’ve been struggling to
understand why.
Monetary policy makers have been surprised by how tame inflation has been and have cited “muted’’ price pressures as a reason why they can afford to be patient in deciding their next move, after four rate increases in 2018. Indeed, Chairman Jerome Powell has said he doesn’t feel the Fed has “convincingly’’ hit its 2 percent inflation target after years of running mostly below it.
“I’m not sure we have a big disagreement here, maybe one of timing,’’ Kudlow said in a Bloomberg Television interview.
Investors also seem convinced that it’s only a matter of time before the Fed lowers rates, based on trading in the federal funds futures market. So far, though, central bankers don’t show an inclination to ease credit.
“I would never say never to a cut,” Philadelphia Fed President Patrick Harker said on April 4. But “in my forecast, I don’t foresee it for this year or next.” In fact, Harker and some other Fed officials think rates are more likely to rise than fall.
The administration’s push for lower rates isn’t only about economics, of course. It’s also about politics. Because monetary policy works with a lag, it would be better for economic growth in 2020 — and for Trump’s re-election prospects — if rates were cut in 2019.
“We don’t want measures that will restrain the economy or financial market conditions,’’ said Kudlow, who also called on the Fed to stop reducing its balance sheet. In laying out the case for Fed rate reductions “at some point,’’ he said that not only is inflation low, it is headed lower.
Kudlow said Trump’s tax cuts and deregulatory actions are boosting the supply side of the economy — prompting companies to add to capacity and boost worker productivity, while encouraging Americans who’ve been on the sidelines to re-enter the labour force. “Strong growth is not inflationary especially when it comes from the supply side of the economy,’’ Kudlow said.
He said that the two men Trump intends to nominate to the Fed board — tax-cut advocate Stephen Moore and businessman Herman Cain — will make that argument when they join the central bank.
If inflation were to move broadly lower, the Fed probably will reduce interest rates, said Peter Hooper, a 26-year veteran of the central bank who’s now Deutsche Bank Securities chief economist in New York.