JACKSON HOLE, Wyo. — President Trump and the Federal Reserve — the nation’s top economic policymakers — believe the U.S. economy is strong and they want to keep it humming. If the economy grows to 2020 without a stumble, it would be the longest expansion in U.S. history by far.
But Trump and the Fed have opposing approaches on what to do next.
Trump thinks the key is to juice the economy with a massive tax cut and low interest rates so businesses and families will go out and spend more. But Trump doesn’t control interest rates, the Fed does. And the Fed is focused on gradually raising interest rates to ensure the economy doesn’t overheat and bubbles don’t form.
In many ways, this is an unprecedented situation: The United States has never experienced so much stimulus at such a good time for the economy, nor has it had this big of a trade war since the 1930s. There is no clear road map for what to do.
Trump has recently publicized the disagreement, breaking with years of precedent by openly criticizing the Fed and its current leader, Jerome H. Powell, a Trump appointee.
For now, Trump’s trillion-dollar tax cut and ramp-up in federal spending helped send stocks to record highs and second quarter growth to 4.1 percent, the best in four years. But concern is growing that Trump’s policies have created a sugar high where growth will peak in 2018 and fall after, possibly into a recession late next year or in 2020.
Trump’s tariffs are another point of friction: The president argues tariffs are a necessary negotiating tool to get better trade deals, while the Fed and many economic and business leaders warn a trade war could slow — or even tank — the economy.
“It’s paradoxical that the United States is starting to put obstacles in the road at a time when its economy is firing on all cylinders,” said Agustín Carstens, head of the Bank of International Settlements, in a fiery speech at the annual gathering of central bankers in picturesque Jackson Hole, Wyo., over the weekend. He warned Trump’s trade policies could set off a “perfect storm.”
The longest U.S. expansion lasted only a decade — from March 1991 to March 2001 — and this current economic upswing would break the prior record if it lasts past July 2019.
Trump is highly motivated to keep the economy charging through his reelection year, and he’s relying largely on his instincts to guide him, buoyed by the fact that his approval rating on economic issues is 50 percent. He told Fox News last week that the market “would crash” and everybody would be “very poor” if Democrats impeach him.
His economic advisers are telling him the tax cut will trigger 3 percent growth this year and for years to come. They say the tax cut will trigger a “supply-side” boom where businesses invest heavily in new factories, equipment and technology that raises productivity — and growth and wages — for years to come.
“The single biggest story this year is an economic boom that is durable and lasting,” said Larry Kudlow, Trump’s top economic adviser, at a recent Cabinet meeting. “Any business economist worth his or her salt would look at these trends and tell you we’re going for a while.”
The Fed and the vast majority of mainstream economists, however, predict 3 percent growth this year that fades quickly to 2.4 percent in 2019 and 2 percent in 2020. The Fed is clear that it relies on data to craft its policies, and so far, it doesn’t see much sign of a supply-side bounce.
“My colleagues and I are carefully monitoring incoming data, and we are setting policy to do what monetary policy can do to support continued growth, a strong labor market, and inflation near 2 percent,” said Powell, the Fed chair, at Jackson Hole.
His remarks came just days after Trump said he was “not thrilled” with Powell for raising interest rates, yet Powell said he believes “gradual” rate hikes “remain appropriate.” Trump’s feud with the Fed is almost certain to escalate in the coming months as the Fed is likely to hike rates again in September and December.
Central bankers at Jackson Hole brushed off Trump’s comments and said they would have zero impact on the decision-making at the Fed, an independent institution overseen by Congress. But most acknowledged they expect Trump to continue his attacks.
“My own view on monetary policy is that it’s a 24-hour-a-day global debate and lots of people are weighing in from all around the world. And given the president’s style, it’s not a surprise that he would weigh in too,” James Bullard, president of the St. Louis Fed, said at Jackson Hole. “But to me, that’s just one more person weighing in.”
For all the rhetoric the president has directed at the Fed in recent weeks, including complaining about interest rates at a private fundraiser in the Hamptons, the president has not personally asked Powell to take a certain course of action, the White House said and Powell told Senators earlier this month.
Powell continues to meet weekly with Treasury Secretary Steven Mnuchin, who has defended the Fed’s independence and urged the president to resolve trade disputes quickly. Powell has also made it a point to meet frequently with Republican and Democratic lawmakers in an effort to be transparent and stay on good terms, a tactic likely to help him if Trump continues his Fed attacks.
The Senate is widely expected to confirm economist Richard Clarida as the Fed’s vice chair this week, a move that will give Powell a full leadership team as he works through this challenging time.
Bullard said he and other Fed leaders are focused on how they can get this economy to last another five years, if not more.
“A recession is not inevitable,” Bullard said.