In recent years, a singular worry has kept Washington’s economic policymakers awake at night: turning Japanese. Few outcomes spook them more than falling into a cycle of stagnation and falling prices that conventional tools can’t reverse.
Could it be that the real threat is turning Chinese?
It’s hard not to wonder given the personalities U.S. President Donald Trump is tapping for the Federal Reserve. Most recently, they include Judy Shelton, a conservative scholar making the case against the independence that’s made the Fed so potent—and largely successful—these last 106 years.
The Fed, remember, was designed to be the opposite of an ATM for the party in power—unlike its Chinese counterpart.
Shelton follows Trump pick Stephen Moore, a television commentator who lobbied for the job reading more from the People’s Bank of China playbook than Adam Smith’s. Thankfully, Moore’s nomination for the Fed board went down in flames after past comments, including retrograde ones on gender, came to light. Yet, he’s just one of a number of Trump Fed picks chosen more for obsequiousness than pertinent qualifications.
Of course, Trump’s fiscal side appointees bear a striking resemblance to the Communist Party apparatchiks rubber-stamping Beijing’s worst impulses. Trump’s yes-man of a Treasury Secretary Stephen Mnuchin has shrouded one of the globe’s most trusted and transparent institutions in a Mao-like fog. Lawrence Kudlow spent decades championing free markets. Now, he advises a White House making China seem like a protector of capitalism as America courts developing nationhood.
Yet it’s Trump assault of the Fed that’s likely to do the most lasting economic damage.
Trump’s fiscal policies, wreckage that they are, could be addressed by the next president, assuming a new one is elected in November 2020. While reducing the $23 trillion national debt achieved on Trump’s watch–or $1 trillion in annual deficits—won’t be easy, it’s doable. Restoring trust in the Fed, the linchpin of global finance, not so much.
What makes Shelton’s comments so concerning is that they’re not a bug, but a feature. The way Trump has gone after Chairman Jerome Powell is, to borrow a word the president has used to characterize his own hand-picked Fed leader, “crazy.” And doesn’t Asia know it?
This region holds more U.S. Treasury securities than any other. Japan and China alone own a combined $2.3 trillion of the IOU’s Powell’s team is supposed to be safeguarding. Trump summoned Powell to a Nov. 18 meeting, later tweeting that they discussed “negative interest,” “easing” and “dollar strength.” All code for the Fed needs to cut rates back to zero and beyond.
Of course, U.S. rates are already negative by some measures. Inflation, for example, rose at a 1.8% pace in October at a moment when 10-year Treasury yields are 1.7%. Sure, Powell’s team could cut its benchmark rate from the current range of 1.5% to 1.75%. But in a world of zero rates from Tokyo to Frankfurt, all that might do is boost stocks at the risk of undermining trust in the dollar.
That’s fine with Trump, so long as he wins reelection. And it’s no coincidence that his team is actively seeking voices—like Shelton’s—who see the Fed’s role more as rubber stamp for the White House than credible monetary authority.
Judy Shelton, U.S. executive director for the European Bank for Reconstruction and Development, … [+] speaks during a Bloomberg Television interview in Washington, D.C.
“I don’t see any reference to independence in the legislation that has defined the role of the Federal Reserve for the United States,” Shelton was recently quoted as saying by Bloomberg. She goes on to say that it’s “not considered inappropriate at the time for everyone to be working together to achieve mutually agreed goals that would benefit the American people.”
This will sound quintessentially Japanese to monetary historians. Since 1999, after all, the Bank of Japan has held rates near, or sharply below, zero. Under Governor Haruhiko Kuroda, on the job since 2013, the BOJ went further than ever. It cornered the bond market with trillions of dollars of purchases and dominated the stock market via massive stakes in exchange-traded funds. Those moves helped weaken the yen by 30%.
Yet, Prime Minister Shinzo Abe would love for Kuroda’s team to go much, much further. Even so, Abe and his Finance Minister Taro Aso have been rather hands-off toward the BOJ in public comments. It’s allowed the BOJ to perverse at least some veneer of autonomy and institutional dignity.
Trump’s approach has a decidedly total-allegiance vibe. Since picking Powell in 2017, Trump routinely attacked him as a “bonehead” and an “enemy” of the country. Trump has reportedly even broached the idea of firing Powell. Earlier this month, Trump tweeted: “The Fed puts us at a competitive disadvantage. China is not our problem, the Federal Reserve is,” adding that U.S. rates should be below those of Japan, Germany “and all others.”
Of course, Trump really is talking about China here. Even inside his #MAGA bubble, Trump can see that his trade war is backfiring. President Xi Jinping hasn’t been the easy mark Trump assumed. And farmers and manufacturers in U.S. states Trump needs to win for re-election are getting slammed by his China tariffs. The Fed, Trump hopes, can save the day in the nick of time.
Powell’s Fed has already eased three times this year and seems unlikely to bow to Trump’s broadsides. For one thing, he and predecessor Janet Yellen worked hard since 2015 to normalize U.S. borrowing costs. Cutting rates to zero after the 2008 global crisis was the monetary equivalent of CPR. It was never meant to remain in place in 20 years later.
That’s Japan’s mistake, of course. By failing to normalize the relationship between money and risk, Japan continues to stagger along—requiring ever more stimulus to keep growth positive. It’s an error that Chinese officials are trying to avoid. It remains an open question that they can.
There’s great irony, though, in Trump’s China-ization gamble. By demanding absolute authority over the Fed, and trying to load it with rubber-stamping apparatchiks, Trump is going the full Mao on the world’s most important financial institution. The only thing Trump is likely to make great here is the magnitude of the crisis when global investors get fed up with his antics.