The Corner

Monetary Policy

The Fed Gets Too Much Credit

The Federal Reserve Board building on Constitution Avenue in Washington, D.C., March 19, 2019 (Leah Millis/Reuters)

Jeanna Smialek and Jim Tankersley write in the New York Times that President Trump takes credit for the good economy of 2018–19 that rightly belongs to the Federal Reserve. They’re right that Trump takes too much credit, as does every president in office during good times. And they are accurately relaying the opinion of a lot of economists and other Fed watchers. But that body of opinion is itself too laudatory toward the central bank.

“By retaining his predecessor’s patient approach to rate increases — and then stopping them altogether as inflation, which the central bank tries to keep under control, hovered at low levels — Mr. Powell’s Fed helped to keep the longest economic expansion in United States history chugging along,” they write. In other words, Powell’s great contribution to the economy was not doing too much harm to it.

The article reflects the conventional view that Fed policy for much of the last decade was accommodative and that Powell deserves praise for withdrawing that accommodation as slowly as he did. Whether Fed policy was accommodative at all, though, depends on what yardstick we use to measure it. Interest rates were low by the standards of the last few decades, and the Fed’s balance sheet was enlarged by asset purchases. But inflation was below the Fed’s announced target for nearly the entire decade, as were inflation expectations. Comparing spending levels to previous expectations also makes money during the period look tight.

The Fed began a cycle of rate hikes in 2015 anyway, and it continued them until it had fairly obviously gone too far. Its December 2018 hike was accompanied by a falling stock market, inflation expectations falling further below target, and reduced expectations for future interest rates. Trump was right to criticize it. And the Fed has now conceded that its actions during that rate-hike cycle were premised on an underestimation of how high employment rates could safely go. Powell genuinely deserves credit for that admission.

His record contrasts favorably with that of a lot of other central bankers, including predecessors in the U.S. and contemporaries abroad. But he could have done even less harm than he did, and the prevailing assumptions reflected in this account have played a part in keeping Fed policy suboptimal.

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