Fed Will Have No Ammunition to Fight Recession if Trump Gets His Way Article Analysis

timer Asked: Apr 18th, 2019
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Question Description

read the article, and answer the questiones

1) What is the concern regarding monetary policy that the article is discussion? Which specific
monetary policy tool is this article discussing?
2) What does the article suggest the Fed is going to do with this monetary policy tool based on
Trump’s influence?
3) Is this expansionary or contractionary monetary policy?
4) Why does Trump want the Fed to do this type of monetary policy? What is the risk with this
type of monetary policy?
5) What other concerns are there for the U.S. economy according to this article?

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The Fed will have no ammunition to fight recession if Trump gets his way thehill.com/opinion/finance/438026-the-fed-will-have-no-ammunition-if-trump-gets-his-way Desmond Lachman, opinion contributor April 9, 2019 Judging by its policy actions, it would seem clear that the Trump administration is not asking itself a basic question: Will the United States have enough ammunition left to fight the next economic recession? Had the administration been asking that question, it would not now be leaning so hard on the Federal Reserve to cut interest rates and to engage in yet another round of quantitative easing at a time that the U.S. economy least needs a monetary policy boost. Nevermind that the U.S. economy currently has the lowest unemployment rate in decades and nevermind that U.S. interest rates are already at historically low levels. Nevermind, too, that over the past decade, the Federal Reserve has already bloated the size of its balance sheet to a staggering $4 trillion and has seriously distorted asset and credit market prices in the process. President Trump now wants the Fed to engage in yet another round of quantitative easing. In an effort to get his way on an ultra-easy monetary policy at precisely the wrong time in the economic cycle, President Trump has nominated Steven Moore and Herman Cain to fill vacancies on the Fed’s Board of Governors. Both Moore and Cain are generally regarded as lacking the minimum monetary policy expertise normally required for the job. Rather, it is thought that they are individuals whom President Trump can rely on to do his bidding. The very real danger of President Trump’s quest for ultra-easy monetary policy at this very late stage in the economic cycle is not only that it might cause the U.S. economy to overheat and thereby rekindle inflation. Rather, it is that it would leave the Fed with little ammunition in its arsenal to fight the next economic recession. With the fed funds rate already as low as 2.25-2.5 percent, further interest rates cuts would leave the Fed with little room to cut interest rates in the event of a recession. Similarly, with a balance sheet at around $4 trillion and with credit spreads already highly compressed, the Fed would have little room to further expand the size of its balance sheet to support an economy in recession. The lack of room for future monetary policy maneuvers would not be so serious if the U.S. had sound public finances. Sadly, however, here too President Trump has irresponsibly thrown caution to the wind. 1/2 He did so in 2016 by enacting a massive unfunded tax cut once again at a time in the cycle that the U.S. economy least needed it. According to the Congressional Budget Office, that tax cut will add to the U.S. debt by a staggering $1.9 trillion over the next decade. The net upshot of President Trump’s fiscal policy largesse is that even in the best of circumstances the U.S. budget deficit will be stuck at around 5 percent of GDP for as far as the eye can see. In the event of an economic recession, the deficit would balloon further as the U.S. tax base would decline. This would leave the U.S. government with little room to use fiscal policy to support the economy in the event that we were indeed to experience another economic recession. With little ammunition left in either the U.S. monetary or fiscal policy arsenals, one must hope that President Trump will soon back off pressuring the Federal Reserve for an easier monetary policy stance. This would seem to be especially the case at a time that there is the all too real risk that a synchronized global economic slowdown coupled with an aggressive "American First" trade policy could push the U.S. economy into recession. Based on President Trump’s past disregard for history’s many lessons about the long-run economic costs of irresponsible macroeconomic policies, as well as on his need to find a scapegoat should the U.S. economy take a turn for the worse, I don't expect him to ease up on his Federal Reserve bashing anytime soon. Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund's Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney. 2/2 ...
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Tutor Answer

School: University of Maryland




Monetary Policy
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1. What is the concern regarding monetary policy that the article is discussion? Which
specific monetary policy tool is this article discussing?
This article is concerned about the ability of the current monetary policy in the United
States to fight recession. The monetary policy is referred to as ammunition which according to
the article will not be effective in fighting recession if Trump gets his way. The article raises
concerns on the monetary policy that has to be boosted. There are certain policy actions by
President Trump that are not in consideration of the monetary policy in place and therefore, in
the event of another recession, the Federal Reserve would be at stake. The author is concerned
that the monetary policy is not strong enough to support the economy despite the low interest and
unemployment rates.
The article discusses one monetary policy tool: quantitative easing which is an expansion
of open market operations policy. Quantitative easin...

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