CreditJohn Taggart for The New York Times
On March 12, 2017, Binyamin Appelbaum writes in The New York Times:
For President Trump and his economic advisers, the strong February jobs report was a cause for celebration — and a first step toward delivering on the president’s promise of faster economic growth.
For the Federal Reserve, it was the final confirmation that the time had come to raise interest rates to prevent the United States economy from overheating.
Mr. Trump and Janet L. Yellen, the Fed’s chairwoman, appear to be headed toward a collision, albeit in slow motion. Mr. Trump has said repeatedly that he is determined to stimulate faster growth while the central bank, for its part, is indicating that it will seek to restrain any acceleration in economic activity.
On Wednesday, the Fed plans to make a first move in the direction of restraint. The central bank has all but announced that it will raise its benchmark interest rate at the conclusion of a two-day meeting of its policy-making committee.
The move itself is minor. The rate is expected to remain below 1 percent, and interest rates on consumer and business loans will still be remarkably low by historical standards. But the Fed is moving months earlier than markets had expected at the beginning of the year, precisely because the economy appears to be gaining steam.
Both Fed officials and independent economists are quick to emphasize that the central bank is not trying to pre-empt the new administration’s policies. The Fed is raising rates because economic conditions are improving. Winter did not chill the United States economy this year. The stock market keeps fizzing upward; employment and wages are growing; companies and consumers are optimistic.
“The thought that by tweaking the funds rate you could send some kind of political message is crazy, and they know that, and they’re not going to do it,” said Jon Faust, an economist at Johns Hopkins University and a former adviser to Ms. Yellen. “On the other hand, this is the first first quarter in about six years that isn’t looking scary, so it’s not surprising they would be considering a rate increase.”
The essential point, however, is that the Fed does not want faster growth. Fed officials estimate that the economy is already growing at something like the maximum sustainable pace. Fed officials predicted in December that the economy would expand 2.1 percent this year, slightly faster than the 1.8 percent pace they regard as sustainable. The Fed will publish new projections on Wednesday.
Growth above the sustainable pace can lead to higher inflation. That, in turn, can force the Fed to raise rates more quickly, a course that often ends in a recession.
Representative Steve Pearce, a New Mexico Republican, asked Ms. Yellen rather incredulously at a congressional hearing in February whether the Fed would really try to offset faster growth by raising rates more quickly. Ms. Yellen’s response was carefully couched, but it amounted to “yes.”
She said the Fed was fine with faster growth so long as it reflected an improvement in economic fundamentals. On the other hand, she said, the Fed would try to offset faster growth “if we think that it is demand-based and threatens our inflation objective” — a technical description of what would happen if Congress cut taxes or increased spending.
The White House and the Fed have very different economic outlooks.
Mr. Trump has repeatedly painted economic conditions in some of the bleakest language ever used by an American president, and he has described his fiscal policy agenda as necessary to revive growth and restore the nation’s prosperity.
Gary Cohn, the head of the president’s National Economic Council, told CNBC on Friday that he expected job growth to strengthen in the coming months.
“We’re very excited about what’s ahead of us,” he said.
Fed officials, by contrast, see the pace of job growth as unsustainable. The unemployment rate fell below 5 percent last May. Since then, employment has continued to expand at an average of 215,000 jobs a month — more than twice the job growth necessary to keep pace with population growth. The faster growth is good news for the economy, indicating that adults who gave up on finding jobs are returning to work. The question is how long that can continue.
There are already growing signs of a tighter labor market. The Federal Reserve Bank of Dallas recently reported that Texas employment in residential construction had nearly reached the level seen before the 2008 financial crisis and that skilled workers like framers, masons and bricklayers were in short supply. Average hourly earnings, adjusting for inflation, climbed 20.3 percent in the Texas construction sector from 2011 to 2016, compared with 5.9 percent for all Texans in private-sector jobs, the Dallas Fed reported. The National Association of Homebuilders reported that 82 percent of builders regarded the cost and availability of labor as their primary concern.
The Fed’s slow march toward higher interest rates is gradually raising borrowing costs for businesses and consumers. The average rate on a 30-year mortgage loan was 4.21 percent last week, up about half a percentage point from the same time last year, according to Freddie Mac. Rates on credit cards and car loans have also ticked higher, although borrowing costs remain well below historical norms.
As for interest on saving accounts, banks tend to raise those rates more slowly than they raise rates on loans. But as the Fed pushes up rates, savings rates will eventually increase, too.
Ms. Yellen and other Fed officials have been careful to acknowledge the persistence of a range of economic problems. Labor force participation is low. Productivity growth remains weak. Middle-income families have seen little income growth.
But these problems, in the view of Fed officials, cannot be addressed by holding down the Fed’s benchmark rate. “Monetary policy cannot, for instance, generate technological breakthroughs or affect demographic factors that would boost real G.D.P. growth over the longer run,” Ms. Yellen said in a speech this month in Chicago. “And monetary policy cannot improve the productivity of American workers.”
She noted that the White House and Congress could adopt fiscal policies that would improve those fundamental factors, although doing so would take time.
The Fed, an institution whose mission was famously described by a former chairman as taking away the punch bowl just as the party gets going, has a long history of angering politicians who would prefer to let the good times roll.
But in this case there is no reason for the Fed to rush. The Fed has indicated what it will do. Now, it can afford to wait and see what fiscal policy makers do.
President Trump has promised “massive tax relief for the middle class,” and his Treasury secretary, Steven Mnuchin, said last month that he wanted to see a bill passed before Congress goes on summer vacation in August. That is an ambitious timetable, not least because health care legislation is first in line. But even if the deadline is met, more months will pass before the money accumulates in the pockets of businesses and consumers, and before the money is spent.
“The thing that makes it relatively easy for the Fed is that fiscal policy usually takes a long time,” said James A. Wilcox, an economist at the University of California, Berkeley. “Financial markets don’t wait for all of that to happen, of course, but the actual spending and employment effects — they usually take a while to show up.”
President Trump and his advisers, meanwhile, have shown little sign of the belligerence toward the Fed that characterized Mr. Trump’s campaign pronouncements.
Mr. Trump has also not seized quickly on the opportunity to appoint his own people to the central bank. Two seats on the Fed’s seven-person board have been vacant for almost three years because Senate Republicans refused to consider President Barack Obama’s nominees. But Mr. Trump has not put forward his own.
Mark Calabria, the chief economist for Vice President Mike Pence, said last week that the White House planned to fill vacancies at the Fed and other regulatory agencies “in short order.” But he added that the administration was still considering its options.
David Nason, a General Electric executive who was regarded as a leading candidate, recently withdrew his name from consideration.
Mr. Trump also has the opportunity to replace Ms. Yellen as chairwoman when her four-year term ends in February, although she could remain on the board.