Donald Trump really could lower interest rates—here's how
President Donald Trump really, really wants interest rates to stay low, and judging by his recent tweets and media musings, berating the Federal Reserve Board and Fed Chairman Jerome Powell is the best way to achieve that.
Many on Wall Street and in government have decried the president's attacks on the Fed, pointing to the long-term danger of undermining the U.S. central bank. But the fact is, if the president wanted to lower interest rates, he could do so—and he doesn't even need to ask the Fed.
While the central bank's structure insulates it from day-to-day politics, there are levers for exerting presidential influence or for bypassing the Fed altogether. Some of President Trump's options for getting a low interest rate are complex, others are simple. Here they are, listed roughly from most unusual to least.
Appoint more Fed governors
Yes: Pack the Fed. The traditional way for the president to put his stamp on the Fed is through appointments to its seven-person Board of Governors. There are currently three vacancies on the board; Mr. Trump has named nominees to fill two of them. As other Fed governors retire, the president has the opportunity to fill more spots.
Complicating matters slightly, though, is the fact that Fed governors don't have sole deciding power when it comes to interest rates. The rate-setting body, called the FOMC, or the Federal Open Market Committee, includes a rotating cast of five regional Federal Reserve Bank presidents, who are not chosen by politicians. (Those five currently outnumber the four Fed governors.) The president's direct control of seven seats, out of a maximum of 12 on the committee, means he could conceivably pack the Fed board with interest rate "doves" and ultimately get his way on low rates—although that would take time, given the realities of the Senate-confirmation process.
Experts on the Fed point out that if Mr. Trump was serious about using this method, he would have already done so.
"The president has had so many opportunities to make appointments to the Federal Reserve board, and he hasn't appointed people who share his view on what monetary policy should be. There's a disconnect between what he says and the people he appoints to the board," said David Wessel, director of the Hutchins Center on Fiscal & Monetary Policy at the Brookings Institution.
Gary Richardson, a Fed historian and professor of economics at the University of California at Irvine, was more blunt: "When Trump appointed Powell, he appointed someone who's going to raise interest rates," Richardson said. "He could have chosen a dove, who wants interest rates to be low. He didn't do that."
Change up Treasury notes
The U.S. Treasury funds the federal government by issuing securities—essentially, loans that take anywhere from four weeks to 30 years to mature. The particular mix of securities hasn't changed much lately. There are some four-week bills, some 13-week bills, some 10-year notes and so forth.
But that mix could change--and if it changes sharply, it could move the markets on interest rates, Wessel said.
"If you did all your borrowing at the very short end, if everything you did was 30-day loans, presumably that would push up short-term rates and push down long-term rates," he said. "Long-term rates are more important to the economy."
This method, dubbed "Operation Twist," has been used intermittently, including under John F. Kennedy and shortly after the Great Recession.
Balance the federal budget
The Fed directly controls only short-term interest rates. Long-term interest rates, which are just as important to economic growth, are not under its control. Instead, those rates are set by the markets and influenced by many factors including inflation, government spending and overall investor confidence.
One factor that's been repeatedly shown to have the effect of pushing up interest rates is the federal deficit. And that figure has recently hit a six-year high of $779 billion for the fiscal year that ended Sept. 30..
"If you're the president of the United States and really think rates are too high, one thing economists will say is you ought to run smaller budget deficits," Wessel said.
There is ample research showing that a one-percentage-point increase in the budget deficit has the effect of raising interest rates a quarter of a percent, or more. That's about how much the Fed has been raising rates every time it meets to do so.
Manipulate the value of the U.S. dollar
This one's tricky. The Treasury Department does have the ability to bypass the Fed and directly influence rates—by intervening in the currency markets. Its Exchange Stabilization Fund holds U.S. dollars and other currencies that can be bought or sold as a last resort in emergencies to shrink or increase the money supply, which can affect the value of the dollar and, ultimately, interest rates. The Treasury used the fund in the depths of the 2008 financial crisis (with the Fed's blessing) to help shore up collapsing money market mutual funds.
"If there are emergencies that affect the exchange rate, the Treasury has this bank account at the New York Fed that they're allowed to use to send trade orders through the Fed," Richardson explained. "It's like a failsafe trigger."
Because the Treasury is under the control of the president, this creates a scenario where Mr. Trump could—conceivably—order it to counteract the Federal Reserve's moves by pulling on the emergency lever to weaken the dollar. In theory, a weaker dollar would be less attractive to foreign currency investors and U.S. interest rates would fall on the slackened demand for greenbacks. Repeat: In theory. Such an unprecedented move without the Fed's support "would cause mayhem," Richardson said, noting the complexities of global currency markets and the dangers of unintended consequences.
"I would presume if the president tried to do this, Congress would respond pretty vigorously," he added. And there's the possibility, however slight, that the Treasury Secretary could refuse to execute the president's order, since carrying it out would make the U.S. a currency manipulator on the world stage.
Stay quiet, stop tweeting
Regardless of actual White House policy, Mr. Trump's public berating of the Fed could perversely be having the opposite effect than the president intends, many economists say. Instead of persuading the FOMC to keep rates low, it could make the committee more determined to hike them before the ever-watchful eyes of the world's banks and investors.
"They have to show they're credible and independent from the executive branch. They're human beings," said Richardson. "It's quite possible they will be more set on their current task, rather than less, by Trump's bullying and insulting them. Where polite persuasion might have gotten him something, the tweeting and nasty insults will cause a counter-reaction."