Trump can't have a strong US economy and low interest rates at the same time, says ex-Fed governor

Key Points
  • The Federal Reserve on Wednesday kept interest rates unchanged and indicated that it may not raise rates at all this year.
  • U.S. President Donald Trump would welcome that development, but he should be wary that his vision for a strong American economy may not materialize, said Robert Heller, a former Fed governor.
Former Fed governor discusses the latest rate decision

U.S. President Donald Trump will likely welcome the Federal Reserve's projection of zero interest rate hikes this year — but he should be wary that his hopes for a strong American economy may not materialize, according to a former Fed governor.

Trump has on several occasions last year hit out at the U.S. central bank for raising interest rates, claiming that such an action was harmful to the American economy. But if the economy were to be as strong as Trump wanted, the central bank would have to hike interest rates, said Robert Heller, a member of the Fed's Board of Governors from 1986 until 1989.

"President Trump hasn't been saying much recently about the Federal Reserve and he should be very happy with the current stance — but he also has a dilemma, a conundrum if you want to call it," Heller told CNBC's "Capital Connection" on Thursday.

"On the one hand, the administration says the economy will grow, perform really well ... On the other hand, they want to have low interest rates. You really can't have it both ways," he added.

Economic expansions are frequently a trigger for inflation — but if the sustained increase in prices goes out of hand, it could erode buying power and hit confidence in a way that hurt growth.

To prevent inflation from reaching levels that could harm the economy, central banks usually raise interest rates so that companies and individuals find it more costly to borrow money. That will in turn help tame over-exuberance in economic activity and inflation.

Looming recession

Heller, who has frequently called for quicker rate hikes by the Fed, said he hopes the central bank will resume monetary policy tightening in the middle of this year. Doing so would give the Fed some room to cut rates to stimulate economic activity during the next recession, he explained.

To some analysts, the next recession in the U.S. — the largest economy in the world — could come as soon as the middle of next year.

The US could be in recession by mid-2020: Strategist

"Our view is that the U.S. will be in recession, or close to recession, by the middle of 2020," Paul Kitney, chief equity strategist in Asia Pacific at Daiwa Capital Markets, told CNBC's "Squawk Box" on Thursday.

The Fed has already slashed its forecast for U.S. economic growth this year. The central bank said on Wednesday that the U.S. would grow 2.1 percent this year, down from an earlier estimate of 2.3 percent and last year's 2.9 percent.

That was in contrast to the more optimistic projection by the Trump administration. In its budget for fiscal year 2020, the administration estimated that the U.S. economy would grow by 3.2 percent this year.