Please consider The Fed Shouldn’t Enable Donald Trump by William Dudley.

U.S. President Donald Trump’s trade war with China keeps undermining the confidence of businesses and consumers, worsening the economic outlook. This manufactured disaster-in-the-making presents the Federal Reserve with a dilemma: Should it mitigate the damage by providing offsetting stimulus, or refuse to play along?

If the ultimate goal is a healthy economy, the Fed should seriously consider the latter approach.

Fed Chairman Jerome Powell has hinted that he is aware of the problem. At the central bank’s annual conference in Jackson Hole last week, he noted that monetary policy cannot “provide a settled rulebook for international trade.” I see this as a veiled reference to the trade war, and a warning that the Fed’s tools are not well suited to mitigate the damage.

Yet the Fed could go much further. Officials could state explicitly that the central bank won’t bail out an administration that keeps making bad choices on trade policy, making it abundantly clear that Trump will own the consequences of his actions.

Such a harder line could benefit the Fed and the economy in three ways. First, it would discourage further escalation of the trade war, by increasing the costs to the Trump administration. Second, it would reassert the Fed’s independence by distancing it from the administration’s policies. Third, it would conserve much-needed ammunition, allowing the Fed to avoid further interest-rate cuts at a time when rates are already very low by historical standards.

I understand and support Fed officials’ desire to remain apolitical. But Trump’s ongoing attacks on Powell and on the institution have made that untenable. Central bank officials face a choice: enable the Trump administration to continue down a disastrous path of trade war escalation, or send a clear signal that if the administration does so, the president, not the Fed, will bear the risks — including the risk of losing the next election.

There’s even an argument that the election itself falls within the Fed’s purview. After all, Trump’s reelection arguably presents a threat to the U.S. and global economy, to the Fed’s independence and its ability to achieve its employment and inflation objectives. If the goal of monetary policy is to achieve the best long-term economic outcome, then Fed officials should consider how their decisions will affect the political outcome in 2020.

Trump Responds

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That response is very mild. I expect more later.

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Of course he is. Trump is clueless about trade and monetary policy.

Central banks are also clueless. Three consecutive economic bubbles are proof enough. So Trump is correct when he calls the Fed clueless.

Moreover, there should not be a Fed in the first place.

But history shows that when governments take over monetary policy, hyperinflation is frequently the result.

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