Here’s the thing about Donald Trump: even his most outlandish utterances contain a kernel of truth. When he accuses China of stealing jobs or tags Jeb Bush as being “low energy,” the charges resonate, because he is saying what many are thinking. On Tuesday, he accused Fed Chair Janet Yellen of not hiking interest rates because “Obama told her not to.” Trump said, “[President Obama] wants to be out playing golf in a year from now and he wants to be doing other things and he doesn’t want to see another bubble burst during his administration.”
His comments came on the heels of the first one-on-one meeting between the president and the central bank chief, at which the two discussed the economic outlook and financial regulation. Asked to respond to Trump’s allegations, White House spokesperson Josh Earnest said, “Of course not. In fact, this administration goes to great lengths to ensure that the Federal Reserve can make monetary policy decisions that are focused solely on the best interests of the country and our economy, and to prevent those decisions from being influenced or even tainted by more narrow political considerations.”
Even though Trump omitted the fact that the Fed Open Market Committee is a body of diverse economic thinkers who actually vote on issues like interest rates, it is undeniable that raising interest rates could cast a pall over the economy, which could hurt Democrats’ chances of keeping the White House in 2016. Voters continue to list the economy and jobs as their number one concern. Higher interest rates would further boost the value of the dollar, especially since the EU and Japan are still in easing mode. U.S. companies are already suffering from a more costly dollar, hit by lower demand for exports and weaker results from consolidating overseas operations. Their problems would multiply.
A rate hike would also put pressure on the stock market, which has benefited from higher valuations attributable to ultra-low interest rates. Extremely low returns on competing investments have driven savers looking for returns into higher-risk assets like stocks. Each time the Fed Chair has mused about raising rates, the stock market has been clobbered. More than half of Americans own shares, either individually or through retirement programs. An ebullient stock market raises sentiment, which translates into higher consumer spending, one of the bright spots in the economy today.
Democrats would be sorry to see the sugar bowl yanked off the table. One major reason—it would increase the cost the nation’s rising debt, which is currently more than $18 trillion. Also, Hillary Clinton has claimed that the economy does better when a Democrat is in the Oval Office; that campaign refrain would sound idiotic if a plunging stock market tipped the still-fragile country into recession.
But, would President Obama really try to sway the Fed? That claim is not so nutty, since Obama has been known to strong-arm those who do not hew to the party line. When the Congressional Budget Office head conjured up its first estimates of the high cost of Obamacare, before the contentious bill had passed, Director Doug Elmendorf was hauled to the Oval Office for a little chat with the president -- a move many considered inappropriate. Sure enough, the CBO’s subsequent figures assessing the impact of the bill were less damning.
President Obama has also publicly scolded the Supreme Court for decisions he considered wrong, like the Citizens United ruling, and used his bully pulpit to influence their deliberations on Obamacare.
More recently, when FBI Chief James Comey challenged President Obama’s narrative on the need for criminal justice reform, he earned himself a summons to the White House. Mr. Comey has spoken out about the “Ferguson effect” on police around the nation, and warned that easing up on strict enforcement could reverse the gains made against crime over the last couple of decades. He has pointed out that those most vulnerable to a resurgence of violence are the very people Obama professes to worry about, and considers abused by tough cops. President Obama has suggested that our criminal justice system is systemically racist, and signaled that reducing sentences and reining in what he considers overly harsh policing will benefit boys and men of color.
So, trying to sway Janet Yellen is not outside the Obama wheelhouse. The Fed Chair has earned some well-deserved criticism in the past several months as she has vacillated over whether or not to raise rates. Her various and sometimes conflicting communications – and the back and forth among members of the Fed Open Market Committee -- have caused substantial uncertainty. The volatility of the stock market in late summer and early fall was one of many reasons Yellen gave for backing away from a widely anticipated rate hike in September. That volatility was in part caused by Yellen herself.
Obama met on occasion previously with Mrs. Yellen’s predecessor Ben Bernanke, so inviting the Fed chief to the Oval Office is not unprecedented. But this is high campaign season. With the Fed sounding the alarm that its long run of ultra-low interest rates may end as soon as December, Obama might have wanted to remind Janet Yellen just how important economic progress is to the fortunes of Democrats running for office. And, to his all-important legacy. Whether Mrs. Yellen can be nudged is another matter.
The muddled messaging coming from the Fed opens the door to just such speculation, as does President Obama’s past strong-arm tactics with other agencies.
We’ll soon know if Trump’s kernel of truth proves out.