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The real 'deep state' sabotage is happening at the Fed

Federal Reserve Board Chair Janet Yellen
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Federal Reserve Board Chair Janet Yellen

Trump administration officials are notorious for their suspicion that a "deep state" of career military, intelligence, diplomatic, or civil service professionals is seeking to sabotage their work. But for a clearer example of sabotage — albeit without much in the way of a conspiracy — Trump would do well to cast his gaze at the Federal Reserve, which, dating back to before his inauguration, has been waging war on an inflationary menace that appears not to exist.

Trump's economy is caught in the crossfire, and growing slower because of it.

With the unemployment rate now low by historical standards, the Fed is steadily raising interest rates — hiking at the beginning of the year and then again at its June meeting.

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Yet the inflation numbers released by the Bureau of Labor Statistics on Friday show that over the past year, the Consumer Price Index has risen by just 1.7 percent. The so-called "core" CPI that many observers believe is more predictive of future inflation conveniently also increased by just 1.7 percent. The Fed, allegedly, is targeting an inflation rate of 2 percent. As you probably know, 2 percent is higher than 1.7 percent. As you may not know, the Fed's inflation index of choice — the Personal Consumption Expenditure Deflator — normally rises about 0.5 percentage points faster than CPI over the course of the year.

So inflation isn't just below the Fed's danger zone, it's well below it. Yet the central bank is working to slow the economy. And Trump's ideological field of vision has been so narrowed by the conservative movement that he doesn't even seem to see that an alternative course of action is possible.

The Fed seems paranoid about excessive job creation

After being excessively critical of US economic performance during President Obama's second term, Trump has flipped recently to being excessively sanguine about job creation on his watch. He brags that the economy has added a million jobs during his first half-year in office, which is true, but it's a slower pace of job creation than we enjoyed in 2016, 2015, 2014, 2013, or 2012.

The slowdown — to be clear — is not Trump's fault. It's the Fed's.

After years of holding short-term interest rates at essentially zero, the Fed raised rates in December 2015 and then again in December 2016. And since the economy keeps growing, the Fed keeps raising rates — doing so twice so far this year and clearly signaling a desire to keep hiking as long as the economy keeps adding jobs.

But why? Low interest rates aren't a panacea for all economic problems. But in general, if companies, homebuyers, and government agencies can borrow money cheaply, that's a nice state of affairs. It means it's affordable for firms, individuals, and governments to make durable investments in business equipment, buildings, and infrastructure that add to long-term prosperity while creating short-term jobs. The reason the Fed can't always keep printing money to keep rates low is that inflation might get out of control. But inflation is not currently out of control.

Indeed, it's not even close to being out of control. A calm, measured approach might be to just leave rates where they are unless and until inflation gets above the Fed's target. If and when that happens, then rates can go up. That might mean a year or so of somewhat above-target inflation, but we've lived through years of below-target inflation, so a small error in the other direction seems like a small price to pay for a chance at widespread job creation.

Trump has more options than he knows

The current Fed chair, Janet Yellen, was put in office by Barack Obama, and so were most of her colleagues on the Federal Reserve Board of Governors. So one might think they really are trying to sabotage Trump.

On the other hand, easier money in 2016 would have given Hillary Clinton a boost in the election and possibly kept Trump out of office in the first place.

It seems much more likely that Yellen and company are simply making a genuine ideological error. But what's fascinating is that Trump doesn't see it that way. Conservatives spent most of the Obama years castigating Yellen and her predecessor, Ben Bernanke, for excessively inflationary monetary policy. The fact that inflation kept not showing up didn't deter them.

Oddly, Trump seems totally unaware that a more growth-oriented Federal Reserve is even an option.

In an interview with the Wall Street Journal, Trump contemplates two possibilities for when Yellen's term expands. One is keeping her in office, because "I'd like to see rates stay low" and "she's historically been a low-interest-rate person." He also considers elevating his National Economic Council Chair Gary Cohn, whom he says he has "great respect" for and thinks is doing "a very good job" in his current role, but under whose watch he believes "interest rates will be moving up" at a somewhat faster pace.

What he really needs are more people like Minneapolis Federal Reserve President Neel Kashkari, who warns that the Fed is currently fighting inflation based on a "ghost story." Kashkari is a Republican, but he's a very lonely voice in conservative economic policy circles today. Most of the people making the case for a more robust push for growth are on the left — often the far left, like the Roosevelt Institute's J.W. Mason. But Trump has the correct instinct here, just an excessively narrow view of the possibilities where he can't think of anyone more inclined to favor low rates than Yellen. And as long as that keeps up, Trumponomics is going to keep underperforming.

Commentary by Matt Yglesias, a writer at Vox. Follow him on Twitter @mattyglesias.

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