A New Advocate for Negative Interest Rate Policy: Donald Trump

I was surprised last week to see Donald Trump directly advocate negative interest rates. You can see his tweet below, along with my reaction.

The Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt. INTEREST COST COULD BE BROUGHT WAY DOWN, while at the same time substantially lengthening the term. We have the great currency, power, and balance sheet.....
— Donald J. Trump (@realDonaldTrump) September 11, 2019

⁦@mileskimball⁩, you may have an unlikely new ally when it comes to the zero lower bound. https://t.co/aHxpNMtRD8
— Brian Flaxman (@brflaxman) September 11, 2019

Here is my perspective on all of this:

"Give Central Banks Independence and New Political Pressures to Balance the Old Ones"https://t.co/k5vyacxnCN
— Miles Kimball (@mileskimball) September 11, 2019

Given Donald Trump's endorsement of negative rates as part of the Fed's toolkit, the idea that negative rates are politically impossible because of Republican opposition should be thrown out the window. https://t.co/uVby0YIS0f
— Miles Kimball (@mileskimball) September 11, 2019

Calling the folks at the Fed `Boneheads' is inaccurate. They are doing a good job. But @realDonaldTrump's efforts to get people used to the idea of negative interest rates are helpful.https://t.co/sJKzGdDzTt
— Miles Kimball (@mileskimball) September 12, 2019

....The USA should always be paying the the lowest rate. No Inflation! It is only the naïveté of Jay Powell and the Federal Reserve that doesn’t allow us to do what other countries are already doing. A once in a lifetime opportunity that we are missing because of “Boneheads.”
— Donald J. Trump (@realDonaldTrump) September 11, 2019

I want to be very clear: Fed policy is appropriate right now. They are being smart. But if the Fed doesn't use negative rates in the next big recession, it *will* be a 'bonehead' policy. https://t.co/zvD9N7aJGj
— Miles Kimball (@mileskimball) September 12, 2019

Donald Trump also reacted to the European Central Bank’s cut in a key interest rate from negative .4% to negative .5% (along with other measures the ECB intends to be stimulative):

European Central Bank, acting quickly, Cuts Rates 10 Basis Points. They are trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting U.S. exports.... And the Fed sits, and sits, and sits. They get paid to borrow money, while we are paying interest!
— Donald J. Trump (@realDonaldTrump) September 12, 2019

Here is my reaction, both to the ECB’s action and to Donald Trump’s tweet about it:

More good work by @realDonaldTrump in explaining negative rates and getting Americans used to the idea. https://t.co/JaMVEUp1e1
— Miles Kimball (@mileskimball) September 12, 2019

Even though the US economy is strong, for every point that major central banks elsewhere cut rates, the Fed needs to cut rates by a fractional point to keep the effective stance of monetary policy the same. https://t.co/VapZxsgeGF
— Miles Kimball (@mileskimball) September 12, 2019

If the Fed cuts by a fractional point for every point that major central banks elsewhere cut rates, aggregate demand can be kept unchanged—though higher demand for investment and durables will be compensating for lower demand from net exports.
— Miles Kimball (@mileskimball) September 12, 2019

My note of approval for Donald’s tweet about the ECB’s action struck Ivan Werning as too much:

Your support for negative rates has gone too far.
— Ivan Werning (@IvanWerning) September 12, 2019

Ivan is one of the economists I most respect in all of the world, so I felt a bit distressed and offered an extended explanation and defense of what I had written, and Ivan added some more reactions:

Politics are key in adding negative rates to the policy toolkit. I don't know anything else other than Trump support (or too late after a big crisis) that could change Republican attitudes toward negative rates.
— Miles Kimball (@mileskimball) September 12, 2019

Being non partisan is great but is not the same as condoning outlandish presidential behavior when it suits some aspect of your agenda.
— Ivan Werning (@IvanWerning) September 12, 2019

In the annals of Trump misbehavior, criticizing the Fed is pretty low down the list. His attempts at several bad appointments were much more potentially damaging than his criticism.

I'm curious what you think about this view of criticizing the Fed:https://t.co/k5vyacxnCN
— Miles Kimball (@mileskimball) September 12, 2019

Well, I simply replied to a tweet where you did not make any separations and just cheered Trump's tweet:https://t.co/t6rFPZGn0H

This has been dragged too far. I see your point. I just don't agree in this case. It's a very fine line.
— Ivan Werning (@IvanWerning) September 13, 2019

Thanks, Ivan. This has been a very interesting discussion, trying to articulate exactly what my philosophy is on this.
— Miles Kimball (@mileskimball) September 13, 2019

Along the way, I had some other Twitter convos about Trump, negative rates and eurozone negative rate policy:

Done right, negative rate policy can make it so aggregate demand is no longer scarce. https://t.co/Xz2vUwCqmq
— Miles Kimball (@mileskimball) September 12, 2019

Yes, the ECB should cut rates more. And it needs to do other complementary policies. The details of my views are in my paper with @ruchirup: https://t.co/H03hLLaUlH
— Miles Kimball (@mileskimball) September 12, 2019

Read “Enabling Deep Negative Rates to Fight Recessions: A Guide” and you will see all the answers. The link is here, along with links for many other negative rate resources:https://t.co/Xz2vUwCqmq
— Miles Kimball (@mileskimball) September 13, 2019

Basis point for basis point, there is no evidence of any diminishing returns to cutting rates, as long as the bank profits problem and the paper currency problem are taken care of. There is unlimited monetary firepower. Aggregate demand is not scarce when M policy is done right.
— Miles Kimball (@mileskimball) September 13, 2019

Read our (@ruchirup and my) paper:https://t.co/aY3M4GdAG8
— Miles Kimball (@mileskimball) September 13, 2019

Here is some other description and commentary I gave of the ECB’s action:

“With interest rates falling further below zero, the ECB also moved Thursday to provide relief for the region’s embattled banks, whose profits have been hurt by negative interest rates. The ECB will create a mechanism to shield banks” 👍 https://t.co/s6J3kmd4BE
— Miles Kimball (@mileskimball) September 13, 2019

European Central Bank launches sweeping package of interest-rate cuts and bond purchases.

Heavy reliance on forward guidance. Little dissent on rate cut or forward guidance; dissent mainly on QE. Key question: how innovative is the shield 4 bank profits? https://t.co/s6J3kmd4BE
— Miles Kimball (@mileskimball) September 13, 2019

European Central Bank President Mario Draghi took firm steps to address the problem of persistently low inflation in Europe.

Key innovations: opening up QE in private sector bonds, more complex interest on reserves formula to protect bank profits. https://t.co/USryq9SxV8
— Miles Kimball (@mileskimball) September 13, 2019

European Central Bank President Mario Draghi took firm steps to address the problem of persistently low inflation in Europe.

Another important change: many commercial banks can borrow for 3 years from the ECB at the full negative rate. https://t.co/USryq9SxV8
— Miles Kimball (@mileskimball) September 13, 2019

Prediction: ECB will need to do more before the recession danger is over. What should they do?

1. Cut rates more; others have already gone as low as -.75%.

2. Tie the shield for bank profits more explicitly to the provision of zero rates to small savers. https://t.co/USryq9SxV8
— Miles Kimball (@mileskimball) September 13, 2019

WSJ says economists have questioned the effectiveness of negative rates. But the ECB took care of the bank profits problem that has been the main worry economists have had so far (given that we are far from seeing massive paper currency storage). https://t.co/BVQf8H4NjG
— Miles Kimball (@mileskimball) September 13, 2019

But my favorite bit of Twitter commentary on the ECB’s action was not my own. It was from “Doo B. Doo”:

Draghi walked away from out of the volcano cool as a cucumber
— Doo B. Doo (@doobeedoo2) September 13, 2019