It may have been overshadowed by the focus on domestic terror attacks, but on Tuesday, President Trump made some unhelpful comments on the state of the economy. Specifically, in an interview with the Wall Street Journal, Trump called the Federal Reserve Bank the “biggest risk” to the economy.
The Journal reported their interview by stating that the president had “escalated his attacks” on the Fed and its Chairman Jerome Powell, threatening the independence of U.S. monetary policy. The greater problem with his comments lay not in process, but in their substance. By calling for continued “easy money” and low interest rates, the president would damage savers on multiple levels.
Low Interest Rates Hurt Retirees
In the full interview, Trump implied that Barack Obama received an unfair advantage, because interest rates remained near zero for most of his term, helping to accelerate economic growth:
I’m very unhappy with the Fed, because Obama had zero interest rates and I have almost normalized—and maybe normalized, depending on who you’re talking to—interest rates. You give me zero interest rates and you show me my numbers with zero interest rates. He had phony numbers because it was based on zero interest. Well, you know, he had—he had zero interest.
Apart from the obvious fact that presidents do not create economic growth—businesses do—Trump’s comments overlook the nearly decade-long punishment that savers, many of them retirees on fixed incomes, faced during the long spell of zero interest rates.
To put it in perspective, from December 2008, when the Fed lowered rates to near-zero, until December 2015, when the Fed finally began raising rates, the consumer price index rose by 12.5 percent. During that seven-year period, savers not only saw next-to-no return on their nest eggs, they lost 10 to 12 percent of the purchasing power of their money due to inflation.
In many cases, savers faced a double whammy. Some lost sizable sums in the stock market crash that preceded the Great Recession. Then, when they moved their much-reduced savings into safer assets, those safer assets effectively lost even more money in real (i.e., after-inflation) terms, because interest rates remained so low for so long.
New retirees who purchased annuities during the period of near-zero interest rates suffered worst of all. Because an annuity bases its payout rate on interest rates at the time of purchase, individuals who bought annuities during the Great Recession got very little bang for their buck. That is, because their money would not make much money while being saved in the annuity, they would receive much-reduced payouts every month.
Trump criticized Powell, saying “it almost looks like he’s happy raising interest rates.” But as a saver, I am thrilled every time the Fed has raised interest rates—I hope they do so again, as expected, during their December meeting. It means my savings are finally making more than zero-point-one percentage point interest. Millions of people, many of them retirees and therefore a key Trump demographic, agree.
Inflation: A Tax On Savings
In his interview, Trump rationalized his call for lower interest rates, by claiming that “there’s not [inflation] of any consequence.” If inflation returned, the president claimed, he’d “even do it [raise interest rates] more.”
But Trump’s claim underestimates the causes of inflation lurking around every corner. Unemployment stands at record low levels, which could easily bleed through to higher wages, and ultimately higher prices. Both tax relief and record levels of federal spending have provided additional fiscal stimulus. Rising tariffs will ultimately result in higher prices for goods.
Trump may also underestimate the pernicious effects of higher inflation when it does arrive. Inflation helped precipitate the largest recession since the Great Depression, in the early 1980s. Loose monetary policy during the 1970s, prompted in part by political pressure from President Richard Nixon, led to inflation throughout the decade. Decisive action by Paul Volcker, who became the Fed chairman in 1979, eventually broke the back of inflation, but not before sparking a major economic downturn in the process.
Margaret Thatcher, a grocer’s daughter, instinctively understood the harm that inflation brings to savers, eroding their life savings. When campaigning in 1979, she posed for a famous picture showing two bags of groceries—one from the start of the Labour government, and one from its end—to show how five years of Labour policies had reduced the value of “the pound in your pocket.”
Wall Street Versus Main Street
Unfortunately, the president may come at the interest rate issue from an entirely different perspective than Thatcher. The property magnate and self-proclaimed “King of Debt” may actually support higher inflation precisely because it reduces the value of loans, making them easier to repay.
But while Wall Street firms and real estate tycoons, who use debt as a matter of course in their transactions, support lower interest rates and higher inflation, the average American saver does not. If Trump wants to support the millions of Americans who save, not to mention the millions of retirees who voted for him, he should let the Fed continue on its course, rather than punishing savers who live on fixed incomes.