No, Donald, the Fed Isn’t Manipulating the Economy for Political Gain

In Monday night’s debate, Donald Trump reiterated a charge he’s been making on the campaign trail: that Janet Yellen, the chair of the U.S. Federal Reserve, is manipulating the economy to make it look better than it is, to help get Hillary Clinton elected. Whether you agree with the Fed’s policies or not, it’s an accusation that is way off base and, when you think it through, doesn’t actually make much sense.

Let’s start with what might make sense: the observation that the Fed, by keeping interest rates low, and previously pumping money into the economy by purchasing bonds, has boosted the stock market and other asset prices. This certainly matches with Yellen’s self-described theory (and that of her onetime mentor, Harvard and Yale economist James Tobin) that by bidding up asset prices, the Fed could, potentially, create a wealth effect that would encourage spending and revive economic growth.

It’s a game plan that’s not without pitfalls and critics. If economic growth does not get the intended kick, boosting asset prices means lower expected returns on investment, which is bad for new savers, and could exacerbate income inequality. But it’s worth asking: By keeping interest rates low, long after quantitative easing has ended, is the Fed really driving the train or responding to circumstances beyond its control?

Right now, the world is awash in overcapacity, especially from chronic surplus countries like China and Germany, which want to grow by producing more than they consume and exporting the balance. That puts downward pressure on prices and investment returns while at the same time adding to a glut of global savings seeking returns. Countries try to ease to generate the missing demand, and the Fed can’t afford to be too far out of step, lest all of those savings and exports gravitate to the United States, making it bear the brunt of the imbalance. Low financial returns on financial assets merely reflect low real returns on real assets — because of real faults in the global economy that the Fed, alone, can’t fix.

So the Fed is keeping interest rates low because the U.S. economy — faced with a weak global economy — isn’t as strong as we might expect or desire and is walking on fragile ground. One can debate whether ultra-low rates really make things better or worse, but that’s the rationale for its actions (or inaction). There is no Potemkin village here, just caution not to make a shaky situation worse. And if the Fed’s low rates actually are making a sluggish economy “better” than it otherwise would be — as Trump charges — well, that’s the whole point of monetary policy. No?

There’s plenty of room to take issue with the Fed’s policies over the past few years. But Trump’s charge that the Yellen Fed is scheming to dress the economy up to look prettier than it is, under President Barack Obama’s watch, just doesn’t hold water. The Fed is responding to an economic picture that is far from ideal, and — agree with its approach or not — there’s no reason to believe that approach would be any different if this were not an election year.

One might respond that the accuracy of Trump’s charge doesn’t matter, that right or wrong it resonates with voters who are frustrated and angry with the powers that be. Perhaps, but that’s an entirely different argument: Instead of the Fed manipulating the economy for political gain, Trump is a skilled demagogue manipulating people’s feelings for political gain. And I would not quarrel with that analysis.

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