How Inflation Could Have Been Worse
The record inflation we are experiencing is being blamed on everything from the war in Ukraine to the Coronavirus relief bill as well as oil prices. One of the reasons inflation is so high is monetary policy. While the Federal Reserve has gotten a lot of criticism for keeping interest rates low, it could have done a lot worse by listening to the former president.
In August 2019, the U.S. economy added 130,000 jobs. On Sept. 11, 2019, then-President Trump made the following statement:
“The Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt. INTEREST COST COULD BE BROUGHT WAY DOWN, while at the same time substantially lengthening the term.”
In December 2019, the economy added 145,000 jobs. On Jan. 28, 2020 the president made the following statement:
“The Fed should get smart & lower the Rate to make our interest competitive with other Countries which pay much lower even though we are, by far, the high standard. We would then focus on paying off & refinancing debt! There is almost no inflation-this is the time (2 years late)!”
In February 2020, the U.S. added 273,000 jobs. In March, then-President Trump made the following statement:
“Our pathetic, slow moving Federal Reserve, headed by Jay Powell, who raised rates too fast and lowered too late, should get our Fed Rate down to the levels of our competitor nations. They now have as much as a two point advantage, with even bigger currency help. Also, stimulate!” “The Federal Reserve must be a leader, not a very late follower, which it has been!”
The economy lost 20.5 million jobs in April 2020, a record at the time. President Trump made the following statement the following month:
“I feel strongly we should have negative rates.”
This is why it is so important that the Federal Reserve maintains its independence. Whether the economy added 273,000 jobs in a month or lost 20 million jobs, the former president was always going to push for increasing the money supply. He apparently never met a rate cut he didn’t like. The following chart lists the M2 money supply for the last 10 years.
Board of Governors of the Federal Reserve System (US), M2 [M2SL], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/M2SL, June 23, 2022.
One can only imagine the economic fallout that would have occurred if the president had gotten his way. Negative interest rates would have drastically increased the money supply and would have pushed inflation even higher. As bad as inflation is right now, it could have ended up much worse.
