Trump is taking credit for the Fed’s work on the economy

President Donald Trump is using the pre-pandemic economy to make a case for his reelection, highlighting time and again that unemployment rates fell to record low levels for black and Hispanic workers in 2019, and that wages were climbing steadily under his watch.

He is also seeking to convince voters that he is rapidly returning America to that prosperous place following waves of pandemic-wrought job loss — fostering what he labelled a "Super V" rebound on Sunday (US time) — and that Joe Biden would "destroy" the economy if he wins in November.

The economy is a key component of Trump’s re-election campaign.Credit:AP

But Trump's story line about his economic track record, particularly what he showcased during his Republican National Convention speech last month, leaves out a crucial detail. Lucky timing and a patient Federal Reserve was pivotal in driving the strong labour market of the late 2010s, economists said. The Trump administration's tax cuts and higher government spending temporarily nudged the economy, but the trade wars cooled it off, so the administration's track record was mixed.

That complicated reality is unlikely to stop Trump from laying claim to the successes of the 2018 and 2019 job market. But voters who want to understand what drove such strong hiring and growth might be better off looking at the actions of the Fed and its chair, Jerome Powell, whom Trump nominated in late 2017 and then spent more than a year attacking on Twitter and in speeches.

By retaining his predecessor's patient approach to rate increases — and then stopping them altogether as inflation, which the central bank tries to keep under control, hovered at low levels — Powell's Fed helped to keep the longest economic expansion in US history chugging along. The stretch of unbroken growth pushed unemployment to its lowest level in 50 years, prompting companies to cast a wider net for employees, pulling long-sidelined workers back into jobs.

"Both monetary and fiscal policy were stimulative, and it did lead to a strong labour market," said Stephanie Aaronson, a former Fed researcher who is now at the Brookings Institution. Very low inflation "has given policymakers the latitude to try new things."

That matters as more than a talking point: It could fundamentally shape the post-pandemic economy. The Fed has signalled that it intends to leave rates low to push unemployment down again, which could help return the labour market to strong levels. But the challenges posed by business closures and job reshuffling mean that elected officials, who have taxing and spending powers that the Fed lacks, may prove crucial to the speed and scope of the rebound.

"The single most important thing we can do here is to support a strong labour market," Powell said in late August remarks. "That is more of an all-governmental society project," and "to wait to the eighth and ninth year of the cycle to get those results — we can do better than that with other policies."

To be sure, it is easy to overstate how strong conditions were before the pandemic struck.

About 83 per cent of adults in their prime working years were in the labour force at the start of 2020, which was a marked improvement but still down from an 84.6 per cent high in the late 1990s. Inequality prevailed. Wage growth had picked up from the expansion's early years, but it remained shy of historical records.

The patient approach taken by the Fed under Jerome Powell paid dividends for the US economy. Credit:AP

Much of the improvement seems to have been driven by a long, steady economic expansion, creating a self-sustaining cycle in which workers got hired, spent more and fuelled demand that created more jobs.

Fed policy helped to enable the progress. Starting under Powell's predecessor Janet Yellen, the central bank chose to lift interest rates at a historically slow pace, treading carefully to avoid crashing the expansion while also trying to avoid runaway inflation.

Powell, who assumed the Fed chair in February 2018, raised rates four times during his first year — still a much slower pace than in prior business cycles — before pausing in early 2019 as markets gyrated. Under his watch, the central bank allowed the unemployment rate to fall to recent lows without trying to offset that change, and even lowered interest rates in the second half of 2019 to help sustain the expansion amid Trump's trade war, which included steep tariffs on Chinese goods.

The good news for the post-crisis recovery and rebound is that the Fed is likely to again let unemployment fall sharply.

In an update to its long-run framework in late August, the Fed officially signalled that it will no longer raise interest rates because of a low unemployment rate alone, effectively codifying the practice adopted last year.

The bad news is that the central bank is low on ammunition to prod the economy. It was able to cut interest rates by only 1.5 percentage points when the pandemic started, compared to cuts that totalled about 5 per cent during the prior two recessions. Relying too much on low rates could make for another very gradual recovery — one like the last long expansion, which took nearly a decade to really pull workers in from the sidelines.

"We really need it to be broader than just the Fed," Powell said of post-pandemic labour market policies, speaking at the Kansas City Fed's conference in late August.

The New York Times

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