The Board of Governors of the Federal Reserve is meeting over the next two days to discuss whether or not to raise the federal funds rate. The federal funds rate is an interest rate that banks assess each other when borrowing money overnight from each other. The Federal Reserve, America’s central bank, drove the rate to near zero in attempt to boost the economy after the financial markets crashed.
Lenders became wary of the collateral other financial firms were carrying in their portfolios, typically asset and mortgage-backed securities that were declining in value due to the inability of commercial and residential borrowers to keep up with interest and principal payments. By buying these securities from financial firms on poor footing and giving them cash, the Federal Reserve hoped to prime the lending pump and provide financial institutions with the confidence to go out and lend again.
Mr. Trump has been taking issue with rate hikes, making the argument that the timing is horrible for the financial markets and the economy overall. To some extent, he has a point; increasing rates could eventually lead to a devaluation of assets sensitive to rate increases, and where these assets are used as collateral for loans, being awarded a loan becomes a lot tougher if a bank does not think collateral is strong enough.
From a political warfare perspective, the media has time to time pointed out Mr. Trump’s apparent lack of respect for the independence of the Federal Reserve, specifically taking issue with Mr. Trump questioning Federal Reserve Board chairman Jerome Powell’s rationale for rate hikes.
But by commenting on the direction of rate hikes, is Mr. Trump really attacking the independence of the Federal Reserve? My answer is no.
Under the Full Employment Act, the Congress, the Federal Reserve, and the President are to coordinate their activities in order to bring about the effective control of inflation, genuine full employment, production, balanced growth, and a balanced federal budget. The chairman of the Federal Reserve is to connect his monetary policy to the numerical goals established by the president in his economic report. That the President was transparent and vocal in pointing out what he considers the Federal Reserve’s pursuit of a policy that seems out of sync with his may be brash, but is not out of step with the coordination the law requires and even the transparency that many citizens in the United States allegedly prefer.
How well has the Trump administration, the Board of Governors, and the Congress coordinated on the economy is subject to another discussion, but the point here is that the media and other critics have failed to give the public a full picture of what is entailed in economic management and this lack of full disclosure on the part of media only adds to Mr. trump’s assertion of fake news and unfair targeting of him by the press.
The other takeaway, of course, is going and investigating other sources of information on the management of the American political economy. In political warfare, you need to know where all the bullets are being fired from. In this theater, the media is a combatant.