When political pressure on the Fed is discussed, the villain is typically a politician with an agenda putting pressure on the Fed, which has usually remained steadfast and unbiased.  Common wisdom today is that President Trump is a politician who is greedily pushing his agenda onto a fair and unbiased Fed. 

But could this time be different? Could the villain here actually be the Fed, which is so opposed to the Trump Plan that it will keep rates artificially high to thwart the President? Could the Fed be maintaining high rates so that Trump will fail regardless of the Fed's dual mandate of employment vs. inflation? 

On the inflation side, key metrics are showing improvement. The Producer Price Index (PPI) was -0.5 percent for April, and it was  +2.3 percent for the trailing 12 months from April. The Consumer Price Index  (CPI) was +0.3 percent for April, and the trailing 12 was +2.4 percent. Meanwhile, the Fed's favorite inflation gauge, the Personal Consumption Expenditures (PCE) deflator, is up only 2.4 percent for the trailing year.

The Consumer Price Index (CPI) deflator, which is closely related to the PCE deflator, has a trailing 12-month value of +2.1 percent, nearly equal to the Fed's goal. An argument can be made that the PCE, excluding food and energy, is more relevant, and it is a laggard at a 12-month value of +2.9 percent. However, when considered in the context of all the readings, inflation is clearly progressing toward the Fed's 2 percent target. 

Meanwhile, employment growth remains unspectacular. The rate held steady in April from the prior month at +4.2 percent, and hourly earnings remained strong. Yet the measures of underemployment and discouraged workers are concerning. Both of those showed weakness in April. Moreover, private payroll surveys such as the ADP report and the JOLTS survey show a bleaker employment picture. 

So, with a tightening job market and a steady decline in key inflation numbers, why has the Fed put its rate reductions on pause? The current Fed Funds rate of 4.5 percent is restrictive, given that it is two percentage points above the inflation rate. Historically, that spread has averaged closer to half that. And, given the massive amount of government debt and the gaping trade deficit, these high rates threaten both our future economy and the present one.

Historically, the Fed has been color-blind when it comes to politics and economic policy. Nonetheless, Presidents have relied on Fed chairmen at key moments of financial decision-making. In 1944, during the Bretton Woods Conference, which reshaped the world economic order, Fed Charman Mariner Eccles was a strong contributor to the outcome. A similar event occurred in 1971 when the Nixon Shock decoupled the US dollar from gold; Fed Chairman Arthur Burns and future Fed Chairman Paul Volcker were key advisors to the administration. 

Yet, in this case, when the threats of dollar destabilization and deficit financing loom, the Fed has been absent. Is this a time when the most important financial regulator in the world decides to choose its political agenda over the best interests of the nation? The Trump agenda does not need to force interest rates to go a certain way. Nonetheless, it should not block the correct policy either.  Fed policy has a bluish tint, but it need not turn the economy Black and Blue.