The Corner

Politics & Policy

Trump Wants the Fed’s Help on Trade


Trump said he needed the flexibility of lower interest rates to support the broader U.S. economy as he fights a growing trade battle against China, and potentially other countries.

“You have to understand, we’re fighting some trade battles and we’re winning. But I need accommodation too,” he said.

The president has repeatedly said that his own tariffs inflict no harm on the economy, and his trade adviser Peter Navarro predicted before Trump started imposing them that no countries would retaliate. The latest remarks, suggesting that the trade conflict poses risks for the economy that the Fed needs to take into account, are an implicit acknowledgment that reality differs from one or both of the administration’s previous points.

What Trump is asking from the Fed is, however, something it cannot provide. To the extent that our tariffs or other countries’ tariffs hurt our economy, it is by adversely affecting its supply side. The tariffs should not change the demand for money balances or the amount of money or money substitutes. They may, however, reduce output and productivity.

The Fed can counter demand-side changes. If a panic is causing people to demand larger money balances, it can act to increase the money supply. It can’t counteract a negative shock to productivity and output.

If the Fed has monetary policy right and then a trade war breaks out, adopting a looser policy in response will only raise inflation to a level higher than the Fed wants without doing much at all to expand the economy. If the policy is too restrictive to start with, on the other hand, then a looser policy is called for regardless of what trade policies the president is pursuing. Either way, the president’s point — that the Fed should relax monetary policy because there’s a trade war on — is mistaken.

Ramesh Ponnuru is a senior editor for National Review, a columnist for Bloomberg Opinion, a visiting fellow at the American Enterprise Institute, and a senior fellow at the National Review Institute.

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