Did Dudley Do Right?
The New York Federal Reserve's immediate past president recently caused controversy by calling on the Fed to make it “abundantly clear" that President Donald Trump will bear "the consequences" of his fiscal and trade policies. But what does "abundantly clear" entail?
HANALEI, HAWAII – William Dudley, the immediate past president of the Federal Reserve Bank of New York, recently stirred up a hornet’s nest when he called for the Fed to consider the impact of its policies on the 2020 presidential election. In fact, Dudley performed a valuable public service by observing that Fed policy can influence politics, sometimes with profound implications for the course of the United States. But that doesn’t mean his recommendations were on target.
Dudley’s logic was straightforward. If the Fed cuts interest rates in response to Donald Trump’s disruptive trade-policy actions, the president may be encouraged to resort to more of the same. Trump believes that the US and China are locked in a trade war to the death. But he also has acknowledged that the stock market reacts negatively to his tariff threats, that trade-related uncertainty weakens growth, and that this damages his reelection prospects.
The worry is that if the Fed loosens policy, thereby minimizing an uncertainty-induced slowdown in investment and growth, Trump will feel free to escalate his China-focused trade attacks. As Dudley put it, the Fed should make “abundantly clear that Trump will own the consequences of his actions.”
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