Should the Fed Enable Trump's Destructive Trade Policies?

David Wilcox (PIIE)

September 6, 2019

The Federal Reserve operates today in a treacherous political climate. On one side, it faces a barrage of hostility from the White House; on the other, calls to avoid "enabling" President Trump's trade wars. The anti-enablers apparently include a surprising voice—that of William Dudley, former president of the Federal Reserve Bank of New York, who argued recently that lowering interest rates as Trump has demanded would only encourage him to escalate his destructive trade machinations, and that the Fed should even consider tilting the electoral playing field against Trump. (Dudley later issued a "clarification" that left many issues unclear.)

Certainly, Trump has entered a new and more toxic realm by asking who is the "bigger enemy"—Fed Chair Jerome H. Powell or President Xi Jinping of China. More broadly, the president's actions are damaging the economy and threatening the ability of the Fed to carry out its monetary policy responsibilities. The Fed must choose how to respond. The right choice for the Fed is to steadfastly remain out of the political fray. To do otherwise would be disastrous for the institution and the country it serves.

The anti-enablers' line of argument has it wrong on two counts.

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