Trump’s Push for Negative Rates Enhances Controversy Over Fed Funds Rate
The United States’ economy seems to be easing off its longest bull market trend in history. This period of economic expansion celebrated its 10-year anniversary in March 2019, beginning from the post-crisis low in March of 2009.[1] However, investor confidence is diminishing in the US and around the globe. This is a result of an apparent world-wide economic slowdown, hastened domestically by ongoing trade conflicts between the U.S. and China. Combined with slowing quarterly economic growth indicators, such as a two-month consecutive decline in the leading economic index,[2] global leaders are taking action to reassure the public that measures are being taken to mitigate this downturn. Should we listen to the Donald Trump’s call for interest rates to be significantly lowered?
Over the past year, the U.S. Federal Reserve has cut its target interest rate from 2.5% to just shy of 1.75%. The reason is to bolster the U.S. economy against the slowdown which has already been deeply affecting Europe, to the extent that multiple nations of that continent have implemented federal funds rates at or below zero.[3] The President of the United States has continued to harass the leaders of the Fed for their passivity and lack of urgency in handling this world-wide economic slowdown, tweeting that interest rates should be lowered into the negatives. In this same tweet from September of 2019, Trump calls for “No Inflation!” and suggests the leaders of the Fed are “Boneheads” for refusing to budge further.[4] What direction will the Fed take from here on? Further steps have been considered extreme. However, should calls for sub-zero interest rates be taken seriously?
Setting lower interest rates is an expansionary monetary policy that increases spending and demand for loanable funds. Firms prefer to invest in capital assets when borrowing is cheap rather than lending to other firms. Firms would lend by buying stocks and bonds or saving their money in banks, and banks use firms’ saving to lend money. Lowering interest rates spurs nations to save less and spend more. It is a last-ditch attempt at reversing the effects of the paradox of thrift, which is the instinct of a household to limit spending during a recession. The limited spending furthers the recession by lowering demand for all goods and services.
A horrible Japanese recession began in 1991, and the nation has suffered from chronically low inflation, primarily hovering around 0% ±1 ever since[5]. Japan’s negative interest rates aimed at attacking its deflation and 25-year stagnant economy. To paint a picture of just how poor economic growth has been, Japan’s 2018 GDP per capita was 10% lower than it was in 1995. The Bank of Japan set interest rates to zero in 1999, and in 2016 they went below zero. The Federal Reserve Bank of San Francisco analyzed the past four years of Japan’s economic activity, and According to their data, investors in government bonds expected more deflation after the BOJ’s move in 2016. Since then inflation expectations have only rebounded in the slightest. The FRBSF suggested, “using caution when considering the efficacy of negative rates as expansionary policy tools under well-anchored inflation expectations,” in its conclusion.[6]
In the Eurozone, five years into what was supposed to be a temporary stimulus injection using negative interest rates, the European Central Bank might push rates even lower. According to a recent Bloomberg article, they’re blamed for “weakening banks, expropriating savers, keeping dying companies on life support, and fueling an unsustainable surge in corporate debt and asset prices.”[7] However, European central bankers are confident that had they not implemented such measures, the surrounding economies would be far worse off.
The U.S. Federal Reserve has been able to keep inflation rates well within a normal range, in recent history. Additionally, six major economic research organizations, including the IMF, OECD, Federal Open Market Committee, and USDA, project U.S. inflation to remain at 2% ±0.3 for the next 1-10 years. Why does the U.S. President want to lower interest rates?
Trump’s level of involvement in attempting to sway the Federal Reserve Board has little precedence in U.S. history among U.S. presidents.[8] His efforts to sway the Fed have been consistent and concerted. Trump stands to benefit from lower interest rates in two blatant ways. Firstly, Trump would have a difficult time getting reelected if the economy experienced an economic downturn within the next year. A no-brain reelection strategy is to seek short-term economic gains as election season approaches. Second, according to a Bloomberg analysis, “Every quarter-point move by the Fed changes Trump’s [business’s] annual interest payments by an estimated $850,000,” which totaled to $17.1 million dollars back in August 2019. Trump’s proprietary company holds assets financed by some $340 million in floating-rate loans.[9]
Lowering target interest rates to zero or lower has not demonstrated success in aiding deflating economies in Japan or Europe. The motives behind the U.S. President’s push for lower interest rates appear extremely dubious and should be taken with a grain of salt because of his ongoing reelection campaign and his company’s position to reclaim millions per year in annual interest payments. Use of this uncommon monetary policy should only be undertaken with extreme prudence and only when deemed appropriate by the economists selected to maintain our economy.
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References:
[1] James Chen, CMT. “Market Milestones as the Bull Market Turns 10.” Investopedia, Investopedia, 16 Oct. 2019, https://www.investopedia.com/market-milestones-as-the-bull-market-turns-10-4588903.
[2] Bartash, Jeffry. “Leading Economic Indicators Fall for 2nd Straight Month, Point to Slower U.S. Growth.” MarketWatch, 18 Oct. 2019, https://www.marketwatch.com/story/leading-economic-indicators-fall-for-2nd-straight-month-point-to-slower-us-growth-2019-10-18.
[3] DeCambre, Mark. “Why Would the Fed Cut Interest Rates a 3rd Time in a Row Even as Stocks near Records? Investors May Soon Find Out.” MarketWatch, 30 Oct. 2019, https://www.marketwatch.com/story/why-would-the-fed-cut-interest-rates-a-3rd-time-in-a-row-even-as-stocks-near-records-investors-may-soon-find-out-2019-10-27.
[4] Trump, Donald J. Sep. 11, 2019 https://twitter.com/realDonaldTrump/status/1171735692428419072?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1171735692428419072&ref_url=https%3A%2F%2Fwww.marketwatch.com%2Fstory%2Ftrump-tweets-support-for-negative-interest-rates-2019-09-11
[5] Inflation.eu, https://www.inflation.eu/inflation-rates/japan/historic-inflation/cpi-inflation-japan.aspx. 22 Jan. 2020.
[6] “Negative Interest Rates and Inflation Expectations in Japan.” Federal Reserve Bank of San Francisco, FRBSF, 26 Aug. 2019, https://www.frbsf.org/economic-research/publications/economic-letter/2019/august/negative-interest-rates-inflation-expectations-japan/.
[7] Bosely, Catherine. “Europe Dived Into Negative Rates and Now It Can't Find a Way Out.” Bloomberg.com, Bloomberg, 17 July 2019, https://www.bloomberg.com/news/articles/2019-07-17/europe-dived-into-negative-rates-and-now-it-can-t-find-a-way-out.
[8] Cox, Jeff. “Trump's Fed Criticism Is Nearly without Precedent in US History.” CNBC, 19 July 2018, https://www.cnbc.com/2018/07/19/trumps-fed-criticism-is-nearly-without-precedent-in-us-history.html.
[9] Nasiripour, Shahien. “Trump Saves About $1 Million With Powell’s Interest Rate Cut.” Bloomberg.com, Bloomberg, 2 Aug. 2019, www.bloomberg.com/news/articles/2019-08-02/trump-saves-about-1-million-with-powell-s-interest-rate-cut.
