I’ve been investing on behalf of clients, and myself, for 25 years now. One of the risks of doing something for such a long time is that it’s easy to become persuaded to believe you’ve seen everything in your craft, and nothing is new.
This inclination is particularly dangerous in the world of financial markets and personal economics. Although I do believe it’s also precarious to use the term “this time it’s different” when refining investment logic, it’s also important to remember that while 25 years may seem like a long time, it’s really only a very partial frame of reference when it comes to modern financial markets and economics.
So I have to say, I was somewhat taken aback when President Trump began openly addressing and speaking about Federal Reserve interest rate policy not long after he took office.
As a New York real estate “guy” Donald Trump knows very well the role interest rates play in business expansion and development. Like most real estate developers, he is no stranger to leverage (having declared multiple bankruptcies), and in my experience with real estate investing he is also likely very sensitive to the cost of debt. So, from a “Trumpian” point of view, publicly discussing interest rates seemed very much in line with what could be expected.
From a presidential point of view, however, this was something entirely new. In my politically aware life, I have experienced six different presidents. I can’t remember ever hearing Presidents Reagan, Bush, Clinton, GW Bush or Obama talk about the Fed or interest rates.
I had also been taught early on in Econ 101 at Purdue that the Federal Reserve was an apolitical, distinctly independent actor, comprised of academics, focused only on an academic interpretation of economic data to meet its dual mandate of price stability and full employment. Like many things taught to us in the classroom, I accepted this information and then saw it apparently validated by real world observation as well.
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Then along came Donald Trump the disruptor. All of a sudden, the President was criticizing the Fed chair by name and providing his version of what he thought interest rate policy should be. From my investor’s point of view this was a bit disconcerting at first. Although, even going into this week when the President was now providing opinion on not only the Fed but the European Central Bank and its policies, I find myself getting used to this new paradigm, I decided that I need to do a little research and find out just how radical all this Trump talk really is. So, I of course turned to Google to find the “truth.”
After perusing the search results, I think I had my answer. An article on Marketwatch by Gregg Robb indicated both Presidents Johnson and Nixon pressured the Fed chair on interest rate policy. The article even claims that Johnson “roughed up” the Fed chair at his ranch.
Another column on CNBC by Jeff Cox states President Reagan criticized then Fed Chair Paul Volcker (arguably the most celebrated Fed chair ever) for his aggressive interest rate policies, and a very informative piece on Economics21 by Mickey Levy details stress between the Fed and most modern Presidents, including an actual firing of the Fed chair by President Carter.
So, after a little online research it would appear the media consternation regarding President Trump’s unprecedented audacity to criticize is just more noise to add to the ether. It makes sense that presidents, who certainly have a vested interest in continuing prosperity, might have an opinion as to how best to achieve this prosperity. And it also makes sense, that as in most pursuits in life, there continues to be a difference between academic reality and the world the rest of us live in.
Perhaps the best summary of the whole topic is found in a quote by American economist Kevin Hasset, “Economists have the same occupational hazard as baseball managers and football coaches: Every person on the street knows their job better than they do.”