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OPINION | The Fed can’t bail Trump out

PRESIDENT Trump’s April tweet that stocks and economic growth would be higher “if the Fed had done its job properly,” is worth re-examining in light of market developments after Mr. Trump won his tussle with Fed Chairman Jerome Powell.

Mr. Powell backed off his brief attempt at “quantitative tightening” under presidential and market pressure. Now that the Fed has “done its job properly,” where are the salutary results?

They don’t seem to have shown up during Wall Street’s dismal May, when the S&P 500 plunged more than 6.5 percent. The market fell even though the Fed is holding its short-term fed-funds target rate, in real terms, at below a percentage point. Could it be that the power of the Fed, despite its skills in manipulating the cost of credit, is grossly overrated? And could it be that blaming the Fed is often a convenient way for politicians to pass the buck for their own policy mistakes?

Some Fed-bashers, troubled by the market decline, want the central bank to scrap even the remaining sliver of a rate — or even, following some other central banks around the world, shatter historical precedent by engineering negative interest rates. The present rate is already well below the real historical average of about 3 percent. The benchmark 10-year Treasury note is yielding less than half that. Chairman Powell nonetheless hinted at further rate cuts Tuesday, sending stocks up and bonds down.

This during the most prosperous period the nation has enjoyed in years, thanks to Mr. Trump’s confidence-building tax reform and deregulation policies. At a time like this, keeping credit cheap runs the considerable risk of creating another credit bubble like the one that inflated from 2001-05.

In response to the crash that followed in 2008, the Fed and the Obama administration embraced “monetary stimulation.” One feature was what Fed Chairman Ben Bernanke called “quantitative easing.” The Fed bought vast quantities of Treasurys and mortgage-backed securities from banks, to inject cash into the economy. Then it used its muscle and a taxpayer subsidy to keep most of that money locked up in bank excess-reserve accounts, so it wouldn’t get loose and cause runaway inflation. The U.S. thereby ducked the inflation that would be expected from such manic dollar creation, but the economy didn’t get much “stimulation.” Instead it lumbered along for eight years with meager growth, wage stagnation and a shrinking labor force.

In short, the Fed wasn’t much help in the face of confidence-shattering Obama policies like his attempt to take control of the electric-power industry and put it in the hands of windmill builders. What the Fed mainly “accomplished” with its zero-bound interest rates was to starve savers and pension funds of adequate returns, driving them into higher risks, and to give the government nearly free credit, which Congress grasped eagerly to balloon the national debt. Even in prosperity, the debt is still ballooning, with a projected deficit topping $1 trillion this fiscal year and total national debt approaching $22.8 trillion. Ironically, advocates of a return to zero rates argue that it would limit the rising cost to taxpayers of servicing that huge debt. By making it even bigger?

Speaker Nancy Pelosi, by the way, pooh-poohs Mr. Trump’s $200 billion infrastructure spending proposal as a “mini-nothing.” She wants $1 trillion or maybe $2 trillion. Mrs. Pelosi’s attitude mirrors a now-popular idea bouncing around among her party’s wonks called Modern Monetary Theory, hatched by economist Stephanie Kelton of Stony Brook University. It holds, in essence, that Congress can spend as much as it wants because the Fed can always cover the cost.

In other words, the Fed would be super-omnipotent. It was already elevated to near-omnipotence when the 1978 Humphrey-Hawkins Act accorded it the responsibility for keeping the dollar sound and workers fully employed no matter what foolishness came out of Congress or the White House. But it has seldom been able to measure up to this assignment in the absence of sound government policies. There isn’t much the Fed can do about the wanton profligacy on Capitol Hill or Mr. Trump’s “easy to win” trade wars, which aren’t going so well. China’s retaliation against American farmers has prompted Mr. Trump to fall back on the dubious New Deal playbook, expanding crop subsidies.

A realistic look at why the Fed’s capacities don’t meet public expectations is offered by a new PBS documentary put together by Steve Forbes and Elizabeth Ames titled “In Money We Trust?” It notes that while the Fed has the power to create money, money doesn’t have inherent value — as any holder of Venezuelan bolivars can attest. It is simply a medium of exchange and a measure of value, and often not a stable one. Money has become even less reliable since politicians broke its final ties with a physical standard of measurement, gold, in 1971. Eight years later, inflation soared into double digits.

It might be easier to reform monetary policy were it not for the return to the politics of limitless spending — and were the Fed’s army of economists not so defensive of the unmerited importance they have been accorded. Right now, their mantra is that a well-functioning monetary policy should shoot for 2 percent inflation. Paul Volcker, the Fed chairman who killed inflation at the behest of Jimmy Carter and Ronald Reagan, is quoted in the PBS documentary wondering how they happened to come up with that number. A currency inflating at 2 percent can hardly be called stable.

Mr. Powell was trying to bring some order to the management of money last December. The politicians handed him his head, and the Fed has been issuing mea culpas ever since. That its rites of contrition aren’t doing much for the economic outlook conveys a worthwhile lesson.

Mr. Melloan is a former deputy editor of the Journal editorial page. His book about the costs of bogus science will be published early next year by Lyons Press.