Most people think that the president has a lot of power over the economy, but that isn’t true. Presidents have very little direct power over the economy by law. The Fed is the only part of government that has the power to directly modify the macroeconomy and I’m amazed how ignorant most people are about what the Fed is doing and there is finally some good news about the Fed’s direction.
I’ve written several posts complaining about how the Fed is set up to help the banks (“Wall Street”) rather than the workers (“Main Street”), but under Jerome Powell, the Fed finally seems to be paying attention to ordinary American working stiffs. Jared Bernstein reports:
Recent research I did with UMass Boston sociologist Keith Bentele finds that in tight labor markets, the annual earnings of all low-income, working-age households grow 6 percent faster than in slack labor markets. For low-income African Americans and single mothers, the differences are 8 and a whopping 13 percent, respectively.
Annual earnings combine the contribution of hourly wages and annual hours worked, and the latter is… a big reason for those earnings gains. The figure below on the left shows a clear, negative correlation between unemployment and annual hours worked for low-income, working-age households. In contrast, the random scatter of dots in the figure on the right shows that labor supply for high-income families is insensitive to the jobless rate.
… because tight labor markets disproportionately help those with relatively low incomes, high-pressure labor markets have an equalizing effect. Economist Josh Bivens recently wrote that “excess unemployment may well explain more than a third of the rise in wage inequality since 1979, and likely contributed to the redistribution of income from labor to capital owners.”
Bernstein says that the Fed has had a change of heart because of meeting with regular Americans and directly hearing stories about how unemployment is affecting them, but I’d speculate that Donald Trump may actually have also had some effect.
Trump is a selfish man and he believes that lower interest rates could help get him re-elected and help him save millions of dollars on his (possibly) billions of dollars of loans that he owes. So he has been lambasting the Fed for not lowering interest rates enough and the Fed may have been subtly influenced to reverse course and lower interest rates.
In general, the president is not supposed to have any power over the Fed’s economic policies because presidents can mess up the monetary system when they try to use it for selfish gain, but occasionally the selfish interests of a president can be aligned with the interests of the average worker and so far we seem to be in one of those times. Yea Trump!