Trump Wants Cheap Money. Why Are Rates Going Up Anyway?

Justin Wolfers (0:00)

Hey there, I'm Justin Wolfers, and this is Platypus Economics, the podcast where we explore the economics that shapes your life. Today, I'm bringing you a conversation I had with Mary Harris over at Slate on their daily podcast called What Next. It's a great show, Mary's a friend and a terrific interviewer, and if you find her stuff terrific either, go ahead and like and subscribe to her feed. We talk about the role that economic policy is playing in US politics ahead of next month's midterm elections.

And along the way, you might even hear me try and slip in a little bit of hard economic insight. So stick around if you want to hear me try to explain the Envelope Theorem on a daily news podcast.

Mary Harris (0:52)

If there is one thing I know about our president, Donald Trump, it is that he loves cheap money.

To Trump, lower interest rates on mortgages, credit cards, whatever, it is the lifeblood of the US economy. It's also a campaign promise.

SPEAKER_3 (1:12)

Getting interest rates down, getting the economy back.

Mary Harris (1:15)

He thinks the US economy deserves cheap money.

SPEAKER_3 (1:19)

And your interest rates are going to be tumbling down.

Mary Harris (1:23)

And Trump's told voters he's going to deliver cheap money.

SPEAKER_3 (1:27)

But we're going to get interest rates down. Interest rates are going down. It's going to be brought down. We will cut interest rates and reduce the monthly cost of your typical mortgage by $1,000.

Mary Harris (1:43)

It is also pretty clear that the president thinks there are people keeping him from delivering cheap money, particularly people inside the Federal Reserve, whose open market committee votes on monetary policy. Back when Jerome Powell was running the Fed, the president made a point of pressuring him publicly to drive interest rates down. Powell mostly brushed him off.

And then Donald Trump got the chance to support his own Fed chair, Kevin Warsh, who a couple of weeks back did something a little surprising. So maybe it shouldn't have been.

SPEAKER_4 (2:15)

Today, the Federal Reserve hiked interest rates for the first time in three years. President Trump's new handpicked Fed chairman, Kevin Warsh, defying the president's calls to cut rates, saying instead...

Mary Harris (2:27)

I gotta tell you, all this left me with a few questions. But that is why I've got Justin Wolfers on Speed Dial.

Justin, can I admit something embarrassing to you?

Justin Wolfers (2:40)

No one's listening, so sure.

Mary Harris (2:43)

I have no idea what's going on with interest rates right now. Like, no idea.

Justin Wolfers (2:47)

Oh, it's all so easy.

Mary Harris (2:50)

Just like an economist to say that.

Justin says, all this back and forth over the Fed's interest rate hike, it's not even the most important thing going on here. Because if you read between the lines, it seems like Donald Trump's handpicked Fed chair, he is inclined to continue raising interest rates.

Justin Wolfers (3:13)

He thinks he hasn't tapped the brakes yet. He thinks he's only taken his foot off the accelerator.

Mary Harris (3:18)

So Kevin Warsh is signaling to you that he's going to raise rates again.

Justin Wolfers (3:25)

He's almost certainly going to raise rates again. Yeah.

Mary Harris (3:29)

What does that mean? Because that seems important. Not that interest rates were raised, but that interest rates will be continuing to be raised.

For the last decade plus, you and I have lived in the land of cheap money. We've maybe built our worlds around it. The idea that we're going to jack up interest rates, it's a little freaky for me.

Justin Wolfers (4:00)

Sure. There are people in their 30s who believe that interest rates are zero more often than they're positive.

Mary Harris (4:08)

That's the thing. It's like this is a big change that seems to be about to happen. Do you feel like the American economy is ready for that change?

Justin Wolfers (4:20)

My answer is, oh boy, I was going to say it is, but I think actually the answer is going to give is we'll see, which is so gutless.

Could it be enough to tip a weak economy from weak to recessionary? Sure, absolutely. Is it going to crash an economy the way it happened in the early 80s? I would find that very, very hard to see.

Mary Harris (4:43)

Today on the show, I talk interest rate anxiety with Justin. Should all this make you worried? How much? I'm Mary Harris. You're listening to What Next. Stick around.

This whole show is going to be about interest rates and how they seem to be going up. Interest rates have been higher before, like not that long ago, and higher in different kinds of ways. Like pre-2008, interest rates looked a lot more like the direction they are in and trending towards now.