On March 15, 2017, the Federal Reserve choose to increase interest rates as part of a series of increases for 2017 and 2018. According to Jonathan Spicer of Reuters, the purpose of such a move by them was two match President Trump’s contractionary fiscal policy with an expansive monetary policy designed to increase economic growth despite significant decreases in government spending and to traditionally beneficial federal agencies. While many may laud the move made to increase economic growth in such a way, there are good justifications to disarticulate the benefits of such an endeavor.
For starters, the desire to further spur economic growth is somewhat nonsensible, in that economic growth is already occurring across the United States. Stocks have never been higher and unemployment has been consistently low. However, insistence on growth at a wider margin (say 4% Reuters) has been perpetuated by the administration. One positive aspect talked about is the benefit of interest rates on saving. While this appears beneficial, the only demographic articulated as saving under this paradigm is seniors, which isn’t exactly helpful in curbing wanton speculation. Even if other demographics began to save, the implication would be that investors would simply push to the margins to find more attractive means of investing and gaining returns on those investments.
Another one of the inevitable impacts outlined by the move is the uptick in inflation rates, which will only progress as rates hike higher into 2018. The obvious implication of this is that the purchasing power of the US dollar is falling. While there can be arguments defending this as beneficial in years to come, there are a few articulations as to why this positions the US negatively. First, the assumption is that a reducing the purchasing power of the dollar means that foreign countries may demand more US exports to effectively trade their dollars for US goods. While in theory this sounds good, there is a disconnect between policy and economics. Trump’s economic nationalism and protectionism has significantly permeated the globe as a signal away from trade to promote production at home. Shawn Donnan, writing for the Financial Times, indicates that that this kind of policy signal could trigger tit-for-tat protectionist trade wars, which decreases the desirability for the US to trade with other countries and vice versa.
Second, is the matter of a decreasing dollar as a measure of US global power. Many are concerned over the lack in quality of President Trump as a leader on the global stage given the relative power of the United States and the antics of President Trump. The high purchasing power of the dollar served as a subconscious reminder, along with some other variables, that the US is still a global force, regardless of who sits in the White House. While it’s just one aspect of US influence abroad, the falling of power dominoes in the United States favor is unnerving, as it may dampen diplomacy, international trade, and US legitimacy around the world.
While there is more speculation than data regarding this recent and spontaneous change by the Federal Reserve, it is certainly clear that making significant changes in monetary policy in this new administration might backfire.