In late-April, the Wall Street Journal reported that allies of former President Donald Trump had hatched a plan to influence the Federal Reserve in a Trump second term. The plan, which was immediately denounced by Trump’s campaign managers, Susie Wiles and Chris LaCivita, proposed giving Trump a direct say in the Fed’s monetary policy.
Instead of challenging the Fed’s independence, Trump should focus on the Fed’s failure to deliver price stability and promise to appoint a new chair who will deliver actual price stability.
President Biden has overseen the worst inflationary period since the Jimmy Carter era. Since he took office, prices have increased at a 5.7 percent annual rate, and the resulting cumulative 19 percent increase in prices has made inflation the number one economic issue amongst likely voters. While the COVID crisis sparked the initial bout of inflation, Biden’s policy mix also bears much of the responsibility for this increase in the price level.
Deficit spending, foreign wars, excessive regulation and dovish Fed appointments are all inflationary. But despite this track record, Biden has refused to change course, instead adopting a strategy of blaming corporations for “shrinkflation” and releasing oil from America’s Strategic Petroleum Reserve to temporarily depress energy prices.
Trump’s first term, by comparison, was a model of price stability. During his four years in office, inflation averaged 1.9 percent. Granted, this achievement was not necessarily all Trump’s doing, given the massive spending increases signed during his presidency. He was more the beneficiary of the last leg of long-running disinflationary macroeconomic forces, rather than the steward of a particularly prudent set of macroeconomic policies.
Given this track record and his known preference for low interest rates, Trump needs a commitment mechanism to signal his pivot to price stability. He could release a list of potential Fed nominees, as he did with the Supreme Court in 2016. This would certainly be useful, but there is no Federalist Society of economists to validate the hawkishness of the list. Instead, insisting that his Fed nominees adopt a zero percent — not 2 percent — inflation target would be more to the point. It would force a serious conversation about stopping inflation and elicit criticism from the monetary mandarins who have a more expansive view of the purpose of monetary policy.
Importantly, the Fed is perfectly free to change its 2 percent inflation objective to zero percent. The Federal Reserve Act directs the Fed towards “the goals of maximum employment, stable prices and moderate long-term interest rates.” Not until 2012, did then-Fed Chair Ben Bernanke have the chutzpah to define price stability as 2 percent inflation, and not until 2020 did the Fed double down on Bernanke’s misstep by adopting a catch-up clause to its 2 percent target.
Americans know that 2 percent inflation is not price stability. If Fed Chair Jerome Powell and his colleagues attempt to defend their inflationary bias and contest Trump’s insistence on actual price stability, Trump would have the moral high ground. At that point, Trump could credibly cast himself as the defender of price stability and the Fed as soft on inflation. Whereas, if Trump challenges the Fed’s independence now, he is the one who will appear to be the inflationist trying to corrupt a principled Fed.
The more clearly Trump telegraphs his commitment to stop inflation, the more the market will be forced to discount his policies. Trump’s commitment to price stability may not force the Fed to raise rates before the election, but it could very well force the bond market to discount higher future rates. The more the market discounts his policies, the easier time Trump will have fighting inflation when he takes office.
Trump can further help his cause by committing to end Biden’s policy of price suppression, most notably of oil. To counteract the Biden administration’s electorally calculated move to sell oil from America’s Strategic Petroleum Reserve, Trump should commit to begin refilling the Reserve on Day One of his presidency. This would force the market to discount the incremental oil demand and begin to reverse Biden’s inflation manipulation before, not after the election.
Political candidates tend to promise the moon and then deal with problems when they take office. This is the wrong approach for a presidential candidate likely to face a post-election spike in inflation. Trump needs to get ahead of the inflation issue by convincing the American people that only he is tough enough to wring inflation out of the economy, and only he will appoint inflation hawks to the Fed’s board.
If Trump can become the candidate of price stability, it will not only help him get elected, but it may also prevent his second term from being dominated by an inflation problem that took root under Biden.
Sean Fieler is president and chief investment officer of Equinox Partners and chairman of the American Principles Project.