Federal Reserve in Washington, D.C. (Kevin Lamarque/Reuters)

Because William Cohan’s op-ed urges the Fed to stand up to Trump and appeared days after Bill Dudley’s much-discussed call for the Fed to defy Trump, the arguments are likely to get mashed together. But the differences are big: Dudley argues that the Fed should tighten money (or refrain from loosening it) in order to make the costs of Trump’s trade policies more apparent to voters and to sway the 2020 election against him. Cohan doesn’t argue that either goal should influence the Fed’s policy. Instead his argument is that the economy needs tighter money and that Powell should stand up to Trump by delivering it over Trump’s objections.


It’s a much more responsible argument than Dudley’s, which was well outside the norm for arguments about monetary policy. But Cohan is still wrong. His central error is one that has plagued a lot of thinking about monetary policy since the financial crisis. He treats low interest rates as though they were purely and simply a choice of the Federal Reserve, rather than (for example) in part a function of low expectations of inflation and of economic growth. And so he thinks that raising interest rates is easier than it may actually be.

Cohan glosses over an episode that illustrates the complication. On his telling, Federal Reserve chairman Jay Powell signaled in November 2018 that he was not going to keep raising interest rates (Cohan’s paragraphs one to four) and then actually lowered them in July (paragraphs 5 and 6). It’s not until paragraph 20 that we learn that “interest rates ticked up just a bit” in December; actually, Powell and his colleagues raised them, just weeks after Cohan had Powell vowing not to do that.


What happened then? Judging from stocks and indicators of expected inflation, the rate hike put interest rates above the neutral or equilibrium rate justified by economic conditions — and judging from fed-funds futures, caused markets to project lower interest rates over the next few years.

If the Fed were right and Trump wrong about the proper stance of monetary policy at the moment, then the proper course of action for the Fed would indeed be to resist Trump’s pressure to loosen. But he is correct, and so it’s Cohan’s advice that should be defied.