President Donald Trump escalated his attacks on the Federal Reserve on Wednesday, demanding that it slash interest rates to zero "or less" so the federal government can refinance the public debt that has ballooned during his administration.
The president has repeatedly complained that the European Central Bank's use of negative interest rates to spur growth tilts global markets against US companies. But the comments marked his first call for the Fed to embrace similar emergency steps and were at odds with his customary boasts about the strength of the US economy.
In a pair of early-morning tweets, the president assailed Fed Chairman Jerome Powell and his central bank colleagues as "Boneheads" for not moving more aggressively to cut interest rates. Trump appointed four of the five members of the Fed's board of governors, including Powell, a frequent target of his vitriol.
"The USA should always be paying the lowest rate," Trump tweeted. "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.' "
Trump's tweets come on the heels of a disappointing jobs report and a week before the Fed rate-setting committee's next meeting. Trump this year has repeatedly attacked the Fed in tweets and public comments, blaming it for any sign of economic weakness even as many economists point to the unintended consequences of his trade war.
In July, the Fed cut the benchmark interest rate for the first time in more than a decade, lowering it by a quarter-point, to just below 2.25 per cent. At the time, Powell said the president's on-again, off-again tariff threats were chilling business investment and spreading uncertainty through the global economy. The central bank chief said the Fed would do whatever was necessary to "sustain the expansion," but he stopped short of promising further reductions.
The last time the Fed cut rates to zero was during the Great Recession, and it has never adopted negative rates, even during the 1930s when one-quarter of the labour force was idle. Despite Trump's impatience with the central bank, there is little sign that current interest rates are hindering the economy. "Credit conditions are about as supportive as they have ever been," the National Federation of Independent Business reported in its most recent survey of small business owners. Likewise, a significant share of large banks eased loan terms, including extending larger credit lines, for their customers, according to the Fed's latest survey of lending officers.
The president's demand that the Fed potentially adopt unprecedented monetary stimulus came less than 24 hours after he said "the economy is booming" in a speech to a Washington audience.
"The president is calling for what essentially are emergency monetary policy measures at a time when unemployment is at a 50-year low, the US economy is doing better than its peers' and is still growing," said David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy.
Trump's call to refinance nearly US$17 trillion ($26.4t) in outstanding public debt also is oddly timed and would be unlikely to save the government much money. Since the 2008 financial crisis, the government has extended the average maturity of its debt to nearly 69 months from about 48, according to the Treasury Department. The current repayment length is above the average over the past 40 years and near the historic high reached in 2001.
As investors have grown more nervous about the global economy, they have poured money into US Treasurys, seeking the assurance of a guaranteed return and liquid markets. That has driven the federal government's borrowing costs to near-record lows: 1.7 per cent interest to borrow money for 10 years and 2.2 per cent for 30-year funding.
In the early 1980s, by contrast, the government was paying nearly 16 per cent for 10-year money.
Last month, the Congressional Budget Office slashed US$1.4t off the government's estimated interest payments over the next decade, saying it expected borrowing costs to be lower than it projected in May.
Government debt, now at a historic high, has climbed more than US$2t on Trump's watch and is expected to grow by an additional US$12t over the next decade, according to CBO. That's because the government is spending much more than it brings in each year through taxes. The Republican-sponsored 2017 corporate and personal income tax cut and big spending increases from Congress in recent years have widened the budget deficit, which is projected to exceed US$1t this fiscal year.
"We should be focusing more on reducing that debt by looking at what's creating that debt rather than at refinancing that debt," said William Hoagland, senior vice president of the Bipartisan Policy Center and a former Republican staff director of the Senate Budget Committee. "This is a clever way of avoiding talking about the real issue."
To refinance the outstanding debt, Washington would need to first buy back from investors existing treasury securities, many of which are trading above their face value, before replacing them with new, lower-rate bonds. "You're really not saving anything," said Mark Heppenstall, chief investment officer of Penn Mutual Asset Management, which manages US$27 billion of investor assets.
In recent years, Treasury has considered capitalising on low borrowing costs by issuing 50- or even 100-year bonds. Officials have held off, fearing the longer duration securities would cannibalise demand for other government debt. But amid talk that US officials are reconsidering, Heppenstall said he thinks there would be adequate investor interest in longer-term securities.
The tweets also suggest Trump's growing unease about the strength of the US economy - his central argument for reelection in 2020. On Tuesday, a Washington Post-ABC News poll found that Trump's approval ratings have slipped and that 6 in 10 Americans now expect a recession within the next year. Trump attacked the results in later tweets Wednesday, calling it a "phony suppression poll."
The European Central Bank is expected to announce even deeper negative rates Wednesday as a means of fueling inflation and securing growth in Europe as economies across the continent contract - a slowdown that some attribute to the fallout from the year-long US-China trade war. But economists and policymakers worry that the negative rates are destabilising the European economy by draining banks, creating conditions that are primed for a crisis.
The negative rates effectively allow companies and governments to be paid to borrow money from global financial markets, while banks must pay to store excess reserves at the ECB. European banks have paid nearly 21.5 billion euros to the ECB since it introduced negative rates in 2014, according to a report from Deposit Solutions, an open banking platform.
Negative rates are an unconventional tool for stimulating the economy; they eat into banks' profits and may make it impossible for some insurance companies and pension funds to earn enough from their investments to meet their obligations to policyholders and retirees. Some insurers could fail while banks cut back on lending, starving the economy of fuel needed for growth.
Today, Japan and seven major European governments, including Germany and France, are able to sell bonds with negative yields, as are corporate behemoths Nestlé and Sanofi, whose size gives investors confidence that they could withstand a downturn.
The amount of this type of debt, issued as government or corporate bonds, has doubled since December and now totals US$15t.
Earlier in the morning, Trump tweeted a quote from CNBC about China's move to suspend tariffs on certain US goods that suggested that China was being hit harder by the trade war than originally expected. The change applies to such goods as lubricants and pesticides and marked a rare de-escalation in the trade war that the United States has yet to reciprocate. But Beijing has not moved to exempt key goods such as agricultural products, which Trump says is central to a deal.
More exemptions may be announced in the coming weeks, China's Ministry of Finance said in a statement.