At the decade mark for the economic expansion, the Fed's capitulation to President Trump on interest rate hikes imperils the Fed more than the economy. But it can cause the next recession, argues former Fed economist Victor Li.
In just over a month, the U.S. economy will complete 10 years of economic expansion, matching the longest expansion in history. The last time this happened, in March 2001, the economy slid from its lofty peak and into recession. The unemployment rate in the months preceding that recession dipped to 3.9 percent, nearly identical to the current rate.
When President Trump came into office, he inherited a growing economy that had seen the unemployment rate fall substantially over the previous eight years. His own appointed Fed Chair, Jerome Powell, committed to continue the normalization of monetary policy that began under his predecessor, Janet Yellen. This was a prudent policy consistent with maintaining low inflation in an economy that was at full employment.
Recent developments in the ongoing drama between Trump and the Federal Reserve have been anything but encouraging. Although Powell vowed to remain apolitical, the FOMC reversed course at its March meeting, implying that they were done with rate hikes for the foreseeable future and ending their balance sheet reduction later this year.
Even more alarming is Trump's announced plans to nominate two ill qualified partisan loyalists to fill vacancies on the Federal Reserve Board of Governors: Stephen Moore and Herman Cain. Moore, a conservative media commentator, has held vastly inconsistent views of Fed policy, from railing against the post-crisis low interest rates during the Obama administration to echoing Trump's criticism of the recent rate hikes and tighter monetary policy.
Economists have long argued that monetary policy performs best when following rules rather than discretion. The stagflation of the 1970s versus the low inflation of the following decades is a perfect example.
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