The looming clash between Trump and the Fed

Rick Newman
Senior Columnist

Markets have gotten comfortable with the prospect of gradual rates hikes by the Federal Reserve. But there may be another looming issue involving the central bank that markets have barely considered.

To Fed chair Janet Yellen and the other economists who dominate the bank’s policymaking committee, the economy is approaching “full employment,” or the point at which the labor market is considered robust. But when President Trump looks at the economy, he sees an “American carnage” populated by “forgotten men and women.”

“There seems to be a difference of opinion between the Fed and the administration over just how tight the labor market is,” Paul Sheard, chief economist for S&P Global, tells Yahoo Finance in the video above. “The Trump administration would probably reckon there’s a lot more scope [to act].”

After a historic era of monetary stimulus and easy money, the Fed is now gradually raising interest rates, to guard against the inflation that sometimes accompanies an overheated economy. That suggests the Fed feels it has done everything it can do to boost employment. Yet Trump obviously feels somebody needs to do a lot more to help manufacturing workers, coal miners and others who have fallen behind in an economy that values high-tech skills and global connections.

Federal Reserve Chair Yellen speaks during a news conference in Washington (REUTERS/Yuri Gripas)

What we don’t know is Trump’s view on the role and effectiveness of monetary policy, because he’s been all over the map on the topic. Last year, he accused Yellen of colluding with President Obama to keep interest rates low, so the economy would perform better under him. But in March, he flip-flopped and said he likes low rates and would like to see them continue. He has also said he’d replace Yellen as Fed chair—and keep Yellen as Fed chair.

He’ll have to decide soon, because Yellen’s four-year term expires next February, and a number of other key Fed posts will open up soon, as well. Trump could reappoint Yellen, assuming she accepted, or go another direction.

“Mr. Trump has a pretty unique opportunity to put a stamp on the Federal Reserve,” Sheard says. “The thing perhaps to look for is if the pendulum is going to swing back from a technocratic, very independent central bank, staffed by very distinguished academic economists, to something more business-orientated, more in touch with the markets.” Jack Welch for Fed chairman? Stranger things have happened, under Trump.

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Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman.