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The Fed: Drumpffeind

So sayeth Donald Trump today. From FoxBusiness:

“My biggest threat is the Fed,” Trump said on Tuesday during an interview with FOX Business’ Trish Regan. “Because the Fed is raising rates too fast, and it’s too independent,” he complained.


To recap, the Fed’s increase in interest rates is by most criteria fairly modest. Consider the implied Fed funds rate assuming no interest rate smoothing, the Laubach-Williams one-sided estimate of the real natural rate, and a target variable of 4 quarter PCE inflation.


Figure 1: Implied Fed funds rate, using CBO output gap, Laubach-Williams one-sided estimate of real natural rate, PCE 4 quarter inflation, and no interest rate smoothing. Source: Atlanta Fed.

If we use the traditional 2% real natural rate instead of the Laubach-Williams estimate, we get an even larger deviation of actual from implied.


Figure 2: Implied Fed funds rate, using CBO output gap, 2% real natural rate, PCE 4 quarter inflation, and no interest rate smoothing. Source: Atlanta Fed.

The actual is 2.76 percentage points below implied, instead of a (mere) 1.62 percentage points.

Just a thought: Venezuela’s Hugo Chavez sought the destruction of an autonomous central bank. Read the story, here. I am constantly amazed at how many purported conservatives are happy with Mr. Trump’s attacks on the Fed.

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