Lost in the turmoil over Trump’s affairs with Stormy Daniels, Karen McDougal and Vladimir Putin, is his recent ridiculous potshot at the Fed. He criticized the Fed for modestly increasing short-term interest rates and continues to whine about it.

Although presidents traditionally leave the Fed alone, Trump’s continuous whining about Fed policy is relatively harmless as there is not much he can do about it. Monetary policy is the responsibility of the Fed, insulated from the president and the congress. But by weighing in on the Fed’s recent hike in short term interest rates, Trump clearly illustrates that he understands less about monetary policy than an alert college sophomore student of economics.

When Trump was campaigning for the presidency he complained vigorously about Fed Chair Janet Yellen keeping interest rates so low. 

“It’s all politics,” he bellered, insisting that she should raise rates.

In fact, as the economy was recovering from the George W. Bush recession, and inflation remained below the Fed’s logical 2 percent inflation target, keeping short-term rates low was the correct monetary policy. During recession and recovery, low interest rates are necessary to allow for the needed business and consumer borrowing and spending.

After Trump was elected, the Fed continued to keep rates low. As the economy continued to improve, the Fed began to raise rates gradually, five times under Fed Chair Janet Yellen.

While some economists suggested that rates could have been modestly raised somewhat sooner than they were during later stages of the recovery, no responsible economist would agree to sharply raising rates during that period. Sharply rising rates would surely risk choking off economic recovery.

In 2018 as Yellen’s term as Fed Chair was up, Trump nominated, and the Senate confirmed, Jerome Powell. As the economy continued to expand — Trump surely agrees that it has — the Fed appropriately raised rates two more times and affirms that more increases are in the offing. It is this latest rate increase that set Trump off on his recent tantrum. He complained that after “all the work” of the president and the congress to “revitalize the economy” — never mind that it was revitalized under Obama — this interest rate increase threatens to “undo our handiwork.”

Once again, Trump is spouting total nonsense. The economy is at full employment. The tax cut bill, although benefitting mainly corporations and the wealthiest of our society, is fiscally expansionary. This expansionary tax bill is augmented by a reckless spending bill that portends trillion-dollar deficits in the near future. As record spending, record annual deficits and a full employment economy threatens inflation already on the doorstep, raising interest rates is the appropriate monetary policy.

The Fed’s low interest rates over the long recovery are credited with rising financial markets over that same period. During that period, every time there was even a hint of raising rates, financial markets were temporarily spooked. This column has consistently asserted that as long as modest rises in interest rates are accompanied by an expanding economy, there is no reason for financial markets to panic. So far, so good — with the seven recent increased short-term interest rates, financial markets remain within striking distance of their all-time highs.

This is not to say there is nothing to worry about. We economists can always find something to worry about and there is plenty on deck. But the Fed’s modestly rising short term interest rates that have Trump all in lather is not among them.

Continuing Income inequality: Although increasing marginally, wage growth continues to lag. Income inequality will continue to be a drag on the economy, as well as be a source of political instability.

The ongoing international trade brouhaha: Trump is concerned that higher interest rates will increase the value of the American dollar, placing our exports at a disadvantage. Yes, all else equal, higher domestic interest rates put upward pressure on the dollar as higher interest rates attract foreign capital. However, there are a number of other factors that affect currency fluctuations. Moreover, the US dollar is not at an all-time high.

At this time, international trade issues have to do with far more consequential factors than currency fluctuations due to small changes in short term interest rates.

The “big enchilada,” figuratively speaking, to worry about is possible inflation due to an overly expansionary fiscal policy that, on top of a fully employed economy, could hyper-stimulate the economy, triggering inflation. This would require not modest, but dramatic increased interest rates that could indeed choke off economic activity and cause panic in financial markets. A full-fledged trade war would complicate this witch’s brew of problems.

We need to caution against the worst of economic worlds, inflation combined with economic recession, or “stagflation.”

Does anybody recall the stagflation and super high interest rates during the late 1970s and early 1980s? Those high interest rates were necessary to choke off the terrible inflation of that period.

The major tool of the Fed, monetary policy, is a very blunt and imprecise policy tool. 

But in view of the current inappropriate expansionary fiscal policy that our proverbial sophomore economics student would never recommend, it may be all we have left. The record deficits created by this inappropriate fiscal policy will deprive the president and the congress of the use of expansionary fiscal policy to get us out of the next recession, when it is really needed.

In other words, during economic expansion, deficits should be reduced, not increased.

Fortunately, monetary policy is in the hands of the Fed. Would anybody trust the congress or, especially this president, to implement monetary policy?

President Trump doesn’t take advice. But he would nevertheless be well advised to lay off weighing in on monetary policy, especially as he consistently insists on the opposite of what needs to be done.

— John Waelti of Monroe, a retired professor of economics, can be reached at jjwaelti1@tds.net. His column appears Saturdays in the Monroe Times.