Trump rightly calls out Federal Reserve for fearing prosperity

Lord, will we ever be free of the idiotic “Phillips curve” notion that prosperity causes inflation? That is basically what President Trump was fuming about when he stated that he was “not happy” with the interest rate hikes by the Federal Reserve. The entire economic establishment hyperventilated over this supposed violation of “Fed independence.” But the American public considers the president to be our economic chief executive, and everyone now calls this the “Trump economy.”

So why should the president not call out Fed chairman Jerome Powell when he thinks the central bank is wrong? In this particular case, Trump may be right and Powell may be wrong. The Fed continues to say that the economy as a whole is “strong enough” to endure higher interest rates. Maybe so, but the fact that you are strong enough to survive hitting yourself in the head with a hammer is not a reason to do it.

{mosads}Yes, the economy is surging, thanks to the tax cuts and regulatory reforms that favor business. We should get 4.5 percent growth in the second quarter, which will be officially reported on Friday. We have the lowest unemployment rates and the fewest claims for unemployment insurance benefits since Neil Armstrong walked on the moon. Does that mean the economy is overheating? It does not because “overheating” is a false notion that somehow there is a limit to growth.

The point Trump is making is that there is no such thing as too much real growth in the economy. He is right and history on his side. After the tax cuts under President Kennedy, the nation routinely had 6 percent growth in the 1960s, with a stable dollar and low inflation. In the 1980s, President Reagan delivered quarters with 8 percent growth, even as inflation fell. As economist Arthur Laffer puts it, “When the economy produces more apples, the price of apples falls, it does not rise.”

Unfortunately, the Fed has become the last bastion of the long discredited Phillips curve theory that low unemployment causes inflation. Too often, the central bank believes that its mission is to suppress rapid wage gains, economic growth, and capital investment before ordinary Americans around the country can feel the benefits. In other words, the Fed regards prosperity as a disease to be attacked, not a condition to be nurtured.

The only job of the Fed should be to keep the dollar stable. If the dollar is stable, consumer price index inflation will remain moderate, just as it did in the 1960s, no matter how fast the economy grows. Wages need to continue rising to make up for years of flat wages under President Bush and President Obama. Oil prices have risen, but other commodity prices are flat or falling. Just look at beef, wheat, and gold.

The most widely followed index of commodity prices is 34 percent lower than it was four years ago. General commodity prices are a better indicator of the real value of the dollar than the consumer price index, which is plagued by definitional and measurement errors. While the consumer price index has risen by a moderate 2.3 percent over the past year, it is still far below the target established by the Fed in early 2012.

The policies of Trump have produced the best of all economic worlds, with surging growth and employment, combine with little inflation and a rising dollar. The sports truism to never change a winning strategy applies here. Unfortunately, the Fed seems to want to do just that, to intentionally slow growth and hold back wage gains. Trump is right to defend the prosperous American economy, which his policies created.

No one elected Powell to lead the central bank. Washington and the academic world seem to treat the Fed as an infallible oracle of truth. But the central bank has been tragically wrong, like in the 1970s and the early 2000s, more often than it has been totally right. If the president is not allowed to criticize misguided Fed policy, then who is?

Stephen Moore is a distinguished visiting fellow at the Heritage Foundation and a consultant for FreedomWorks. He is a senior analyst for CNN and served as an economic adviser to Donald Trump’s 2016 campaign. Louis Woodhill is a economics writer and venture capitalist based in Dallas.