For much of the past decade, Donald Trump and other Republicans ripped the Federal Reserve for keeping interest rates too low, a policy they said risked blowing up giant asset bubbles and artificially boosted the economy under then-president Barack Obama.
Now Trump and his top internal and external advisers are blasting the Fed for raising interest rates and demanding the central bank pump cash into the system to boost the economy as the 2020 election approaches.
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And the president himself wants a new Fed chair, preferably one of the new converts to the idea of easy-money policies. Trump last week tapped one of the biggest flip-floppers on interest rate hikes for a seat on the Fed board, tweeting that he intended to nominate Judy Shelton, who for years slammed low rates for punishing savers and rewarding wealthy investors — but now says she strongly supports rate cuts.
Those who’ve changed their views offer multiple rationales, including that they were just wrong and that economic policy is better suited now for low rates. Progressives and some economists say it’s pure partisanship and a double standard in which low rates are bad under Democrats and good under Republicans.
“Given that Trump has flip-flopped so much on rates, it’s not surprising that he’s stacking the deck with other flip-floppers,” said Megan Greene, economist at the Harvard Kennedy School of Government. “He doesn’t have any real ideology and he’s picking people who also don’t have any real ideology.”
Trump himself executed the sharpest about-face on interest-rate policy.
While running for president in September 2016, he said of the Fed: “[W]hat they are doing is, I believe, it’s a false market. Money is essentially free.” He said then Fed Chair Janet Yellen “should be ashamed of herself.” In November 2015, Trump said low rates were creating a bubble and that “Janet Yellen should have raised the rates.”
Trump as president dumped Yellen as Fed chair and installed Republican lawyer and Fed governor Jerome Powell, who continued Yellen’s policy of gentle rate hikes in a period of low unemployment and solid growth — fueled in part by the GOP tax cuts.
Over the last several months, Trump has been on an angry tear against Powell, demanding the Fed chair lower rates. Last month he accused the Fed of behaving like a “stubborn child” and said “we need rates cuts, & easing.”
Shelton, for her part, publicly called for dropping rates to as low as zero after reports emerged that she was on the short list for the Fed, telling the Wall Street Journal that rates should be reduced to support Trump’s pro-growth agenda.
“When you have an economy primed to grow because of reduced taxes, less regulation, dynamic energy and trade reforms, you want to ensure maximum access to capital,” she said.
That could not be more different from her longstanding contention that the Fed should strive for no inflation — rather than its current 2 percent target — a position that would call for higher rates in the face of inflation hovering a bit below 2 percent. She has also railed for years against low rates that have made “suckers” out of savers over the past decade.
Shelton did not respond to requests for comment, but her newfound desire for low rates also appears to be tied to another goal of hers: phasing out the Fed’s post-crisis approach to setting monetary policy. That would require lower rates in the short term but also a continued shrinking of the Fed’s bond holdings, something much less likely to please the president, who has repeatedly blasted the Fed for that process, known as “quantitative tightening.”
Shelton, who Trump said he would nominate alongside St. Louis Federal Reserve economist Christopher Waller, follows the president’s attempted nomination of conservative economist Stephen Moore, who for years railed against the Fed’s easy money policies and is now a strong advocate of immediate rate cuts.
In an interview, Moore said he erred in the past in calling for rate hikes. “I think I was wrong on being so hawkish in 2010 or 2011,” he said. “The point I was trying to make then was you cannot compensate for bad fiscal policy, bad economic policy, by quantitative easing or things like that, it doesn’t negate the negative impact.” He was referring to the Fed’s policy of buying trillions of dollars in assets to try and pump more money into the economy.
Now Moore says that the tax cut on corporations and Trump’s deregulatory policies create a better environment for growth and the Fed should not stand in the way.
“Right now I do think that the Fed is too tight and that the increase in the supply of goods and services through these policies have led to a situation where there aren’t enough dollars,” he said. “Right now too few dollars are chasing too many goods. That’s where I’m at.”
Trump’s top economic adviser, Larry Kudlow, also spent several years criticizing the Fed’s moves to slash rates to near zero after the financial crisis and its keeping them there for seven years until Yellen executed the first hike in December 2015.
In March 2010, in a column headlined “Yellen is Spellin’ Future Inflation,” Kudlow warned of inflationary risks from Fed policy and predicted that Yellen “will be the last Fed governor to turn out the lights on the central bank’s zero interest rate.”
Kudlow, who recently called for an immediate half-point cut in rates, said in an interview that he changed his mind on Yellen and interest rates well before Trump’s rise. “I got off the inflation thing years ago, around 2013,” he said. “I think I’ve been very consistent.”
Kudlow added that his advocacy for rate cuts now amounts to a call for the Fed to acknowledge that it went too far in its hikes, not that the entire policy of trying to return to a more normal rate environment was wrong.
“I don’t regard this as easing move per se, I look at this as taking back a mistaken rate hike,” he said. “I don’t mean to split hairs but I think there’s a difference. It is an insurance policy.”
Kudlow also said he is worried about the fact that long-term interest rates are now lower than short-term rates, a so-called inverted yield curve. “That’s an unholy place to be. I don’t know that it spells recession. I’m just saying it makes me uneasy,” he said.
Even Senate Banking Committee Chairman Mike Crapo (R-Idaho) reversed his criticism of the Fed’s easy-money policies in April after Moore, then Trump’s pick, called for a rate cut. “I personally think that we’re at a point where [rates] could be reduced a little bit now,” he told Bloomberg. “At their current level they are creating a little bit too much of a dampening on the economy.” Crapo’s office declined to comment.
Progressives who have long advocated for the Fed to hold off on rate hikes and allow the economy to run hotter and draw more people back into the labor force — often called “doves” — are skeptical of all these rationales for conservatives flipping their views on monetary policy.
But they also point to the data for the past decade, showing that conservative “hawks” warning of impending inflation from low rates have been wrong.
“Their sudden, 180-degree conversions suggest political opportunism,” said Sam Bell, policy director of Employ America. “At the same time, there are still very good reasons to lean dovish and the rest of us shouldn’t be reflexively hawkish just because Trump is selfishly dovish.”
And even some who are newly calling for lower rates have criticized Trump’s radical shift on interest rate policy.
“The problem with him bashing Powell all the time is that he put Powell in there in the first place,” Moore said. “He only has himself to blame if he’s not happy with monetary policy.”
“And he’s for lower rates for different reasons than I am. He really does think pumping money into the economy will cause growth and that we need that stimulus going into 2020. That’s not what I’m saying. I just want to see commodity prices come up.”
Economists also question whether rate cuts, which the Fed has now signaled are coming, will actually do much to boost the economy. They could instead lead to higher stock prices in the short term while not impacting the real economy very much.
“I don’t think rate cuts will actually help much,” Greene said. “There is not a credit supply problem. It’s a credit demand problem. The cost of borrowing is hardly a constraint. Nobody is reporting problems getting credit.”
“Cutting rates I don’t think will boost the economy,” she added. “You could boost the equity market but it would just be short sugar hits.”