The Fed will have no ammunition to fight recession if Trump gets his
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
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
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.
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
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.
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