President Trump has escalated his attack on the FED sparking an unprecedented move in monetary policy.
Nearly all of Mr. Trump's presidential predecessors have steered clear of critiquing the Fed in a public way.
In fact, President Donald Trump's criticism of the Federal Reserve has little precedent in history.
The closest analog of Mr. Trump's verbal attack on the FED — was how former President Richard Nixon arm-twisted Arthur Burns to maintain loose monetary policy as Nixon sought re-election in 1972.
Needless to say, Nixon’s war of words at the FED didn't work out well:
As the 1970s economy continued to grow, inflation took root thanks to low rates and remained at a gridlock until the early 1980s, when then-Fed Chair Paul Volcker had to tighten policy sharply.
That in turn pushed the economy into a deep and dark recession.
In an interview with Fox Business,
Trump acknowledged the Fed's independence and said he hasn't actually even had a conversation with its chairman, Jerome Powell.
Recently, Mr. Powell spoke at a conference of Rhode Island business leaders and said,
“There is always some probability of a recession.”
The job facing the Fed and its chairman, Jerome Powell, is on the verge of getting trickier following the longest economic expansion on record in history.
Could Jerome Powell (who is the richest Fed chair since 1948) lay a trap to blame Mr. Trump for the next recession?
It certainly looks that way.
Krishna Guha, head of global policy and central bank strategy at Evercore ISI, has a term for the dilemma: the “train wreck” scenario.
Former Federal Reserve chairman Ben Bernanke put it more colorfully at a conference in June.
The stimulative benefit of the tax cut “is going to hit the economy in a big way this year and the next year,” he said.
“And then Wile E. Coyote is going to go off the cliff.”
Regardless of the true dates of the “train wreck” scenario, this much we know:
The seeds of the next economic crash have almost certainly already been planted and Mr. Trump is being set up to take the blame.
The question is “when,” not “if.”
Under this perspective, Mr. Trump’s words on the Fox Business network sound a warning alarm.
Mr. Trump is right, his biggest threat is the Federal Reserve:
“… My biggest threat is the Fed because the Fed is raising rates too fast. And it's independent, so I don't speak to him. But I'm not happy with what he's doing.”
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