President Trump has complained that the Federal Reserve has been hurting the economy, first by raising interest rates and then by not lowering them fast enough. “No help from Fed!” he said on Twitter last week, in what has become a typical broadside.
But a New York Times analysis shows that under Mr. Trump, Fed policy has supported Mr. Trump’s push for economic growth. In fact, the central bank has kept interest rates lower than under any other president since Jimmy Carter, when adjusted for the economy’s output and inflation.
At the same time, Congress has provided an unusual level of fiscal support. Only one president in the past 25 years got a bigger lift from tax cuts and federal spending increases than Mr. Trump has since he signed the 2017 tax overhaul. That was George W. Bush, whose two terms included several rounds of tax cuts and deficit-financed wars in Iraq and Afghanistan.
The stimulus measures have helped Mr. Trump’s trade war with China by buffering the economy against damage from tariffs imposed by both countries. But as the dispute escalates, that insulation may not be enough.
Mr. Trump has moved to add a new round of tariffs on Chinese products and to declare China a currency manipulator, while Beijing has canceled what officials had said would be new purchases of American agricultural goods. Economists warn that the moves will hurt growth in both countries, and that the Fed, in particular, has only so much help to give.
“Until the most recent escalation, it seemed that the Fed had at least been able to partly offset the drag from the trade war,” said Michelle Meyer, chief United States economist at Bank of America Merrill Lynch. “The Fed is attempting to sustain this recovery, and attempting to support growth, but there are clearly limits.”
The analysis draws on data from the Brookings Institution’s Hutchins Center on Fiscal and Monetary Policy and a monetary-policy gauge devised by a Stanford University economist. It found that since the final quarter of 2017, when the $1.5 trillion tax overhaul was enacted and unemployment was just above 4 percent, Mr. Trump has enjoyed unusually large levels of fiscal expansion and monetary accommodation for a period of such little joblessness.
The federal budget deficit usually falls when the unemployment rate declines, with additional economic growth yielding more tax revenue. Mr. Trump has bucked the trend. Corporate tax collections have tumbled under the Republican tax cut he championed, and there have been bipartisan agreements to bust budgetary caps created under President Barack Obama. This past spring, the Hutchins Center estimates, tax and spending policy added more to economic growth than in any quarter since 2010, when the country was just beginning to recover from a recession.
Mr. Trump signed legislation for the most recent spending increase last week, a move that the Hutchins Center projects will add even more stimulus. That could be the last dose for a while: Congress is unlikely to push through another large tax cut or increase in spending before Mr. Trump faces re-election.
The budget deficit is on track to top $1 trillion this year, according to the administration’s own projections, which would be an increase of more than 25 percent from 2018. It has grown throughout Mr. Trump’s time in office, in dollar terms and as a share of the economy. Mr. Trump ran larger annual deficits in 2017 and 2018, as a share of the economy, than any president since World War II with an unemployment rate below 5 percent.
Mr. Trump frequently asserts that he has been victimized by Fed policies, and that the economy would have grown significantly faster on his watch if the central bank had kept rates closer to zero over the past two and a half years. He seemed unimpressed with the lowering of rates last week, and on Thursday he said Fed officials “have called it wrong at every step of the way,” adding, “Can you imagine what would happen if they actually called it right?”
Across most of America’s history, presidents with economies as strong as Mr. Trump’s have experienced Fed policies that are much less supportive of growth.
There are a few ways of thinking about how much the Fed’s policies are doing to help the economy at a given time. One is to compare interest rates set by the Fed with what economists call a neutral rate — the level, based on long-term trends like demographics and productivity, that would neither stoke nor slow growth. Another is to compare it with the most common monetary policy-setting equation, a rule named for the Stanford economist John Taylor.
Professor Taylor’s formula assesses growth and inflation relative to their potential and the Fed’s goals, and spits out a recommended interest rate. Comparing the gap between the actual rate set by the Fed and the neutral rate indicates the degree of stimulus being applied. Comparing the gap with a Taylor Rule recommendation offers another perspective, measuring the Fed’s rates against key indicators of the economy’s condition.
The neutral-rate analysis shows that Mr. Trump has benefited from Fed policies that are likely to stimulate growth, although to a smaller degree than Mr. Obama and Mr. Bush. Mr. Obama also benefited from a large-scale bond-buying program meant to stoke growth, and from the Fed’s pledges to maintain low rates for an extended period after the financial crisis, efforts that are not captured by the analyses. The central bank ran out of room to cut rates in 2008, when it slashed them virtually to zero, curtailing how much interest-rate help it could offer under Mr. Bush and Mr. Obama.
From late 2017 to this month, the Fed pared its bond holdings, making monetary policy more restrictive. But it is difficult to quantify how much that mattered to growth.
It is true that the Fed could have left rates at zero under Mr. Trump, and policy watchers on the left and right have urged a gradual approach to rate increases with inflation remaining benign.
But it is also the case that officials have been extraordinarily patient by historical standards, leaving Mr. Trump with a growth-friendly policy climate. Mr. Bush and Mr. Obama both experienced recessions while in office. Adjusting for the strong economy Mr. Trump inherited, the analysis using the Taylor Rule shows that the Fed has set rates lower on average during Mr. Trump’s tenure than under any president since Mr. Carter.
Still, growth is slowing this year from its annual rate of 2.5 percent in 2018. Economists warn that it could slow further if Mr. Trump follows through on the threat to impose tariffs on an additional $300 billion of Chinese imports in September, joining the tariffs he levied on steel, aluminum, washing machines and other goods and prompting China to retaliate.
With other clouds forming over the global economy, including a manufacturing slowdown and possible disruptions from Britain’s planned exit from the European Union this fall, many economists expect the Fed to cut rates further to support growth.
“The Fed has been increasingly responsive this year to trade war threats, bond market expectations, and global growth concerns,” Goldman Sachs economists wrote this week in a research note. They predicted two more rate cuts this fall, but they said that rising inflation would stop the cuts by December.
The Fed does have some ammunition. It has room for eight more quarter-point rate cuts, and it could engage in renewed bond-buying. Fed officials, including Charles Evans, the president of the Federal Reserve Bank of Chicago, have implied that the central bank could cut rates a little more to support the economy should trade concerns lead to an economic pullback.
For now, the Fed is “in a period where we’re looking at the data” and assessing whether additional cuts are warranted, Mr. Evans told reporters on Wednesday.
But the monetary policy runway is shorter than it was ahead of the recession of 2007 to 2009. At that time, the Fed started with interest rates above 5 percent, leaving it with far more room to cut. Lower rates help to prop up growth by making it cheaper for consumers and businesses to borrow and spend.
James Bullard, the president of the Federal Reserve Bank of St. Louis, told reporters at an event in Washington on Tuesday that the Fed was reacting to a one-time increase in trade uncertainty and sought to rebut the idea that it would move to counter every new development.
“I don’t think it’s realistic for the Fed to respond to each threat and counterthreat in a tit-for-tat trade war,” Mr. Bullard said. “You would destabilize monetary policy, and this would create more problems than it would solve.”
