President Trump has been right, in my view, to seek a looser monetary policy throughout his time in office. On that fundamental question, his instincts have been better than Fed chairman Jay Powell’s. Over the last two days, Trump and Powell have expressed differing views on another monetary issue, with the former seeking negative interest rates and the latter opposed. This time, I think Powell is right.
Trump’s thinking on monetary policy is often shaped by the pursuit of competitive advantage for U.S. exporters. The idea that negative rates in other countries will increase their trade balances and decrease ours seems to be in the background of his view that we should copy them. But there are good reasons to doubt that any such effect on trade balance will be large and lasting.
Economists who favor negative rates generally do so for a different reason: They want to give the central bank more power to stimulate the economy. If the neutral interest rate — the rate that neither has a contractionary nor stimulative effect — is zero, then the only way to have a stimulative interest rate is to go below zero. If the neutral interest rate is below zero, then the central bank needs to push rates below zero just to avoid being contractionary.
The idea raises many practical and political problems, and the proposed solutions to those problems, such as the abolition of cash, raise still more. I would vastly prefer for central banks to fight recessions in other ways. Committing to using interest rates and quantitative easing to keep the path of spending on target is one way — not least because it would tend to raise the neutral interest rate and thus keep us out of negative territory. I don’t expect the president to endorse a change to the Fed’s nominal-targeting regime, but I hope that Powell and his colleagues will consider it as a better means of achieving the objective that they share with him.