AP fact check: Trump challenges Fed with dubious theory

TRUMP on Twitter on Friday: “Because of the faulty thought process we have going for us at the Federal Reserve, we pay much higher interest rates than countries that are no match for us economically. In other words, our interest costs are much higher than other countries, when they should be lower. Correct!” and “We are in a World competition, & winning big,.......but it is no thanks to the Federal Reserve. Had they not acted so fast and ‘so much,’ we would be doing even better than we are doing right now.”

THE FACTS: Trump’s support for the Fed slashing rates to rival Europe’s lows flies in the face of basic economics.

He’s repeatedly said the Fed has been stifling stronger growth and openly criticized Fed Chairman Jerome Powell, his own choice to lead the U.S. central bank.

But the Fed’s decision to hike rates four times last year was because U.S. growth had strengthened — and there was an eventual risk of inflation or asset bubbles that might hurt the economy if the Fed kept short-term rates too low.

The general theory is that central banks cut rates in countries in a downturn or period of weak growth, a bit of stimulus meant to get an economy back on track.

In fact, Trump was mistakenly critical of Fed efforts to revive growth during Barack Obama’s presidency, when he argued the issue from the other side. Trump tweeted in 2011 that “reckless policies of low interest and flooding the market with dollars” would cause record inflation. But that inflation never materialized because the economy was still recovering from the Great Recession.

Even with last year’s Fed rate hikes, the borrowing costs of the U.S. government are historically low. They’ve even declined recently as financial markets have adjusted to the likelihood of slower economic growth this year and the possibility of Fed rate cuts.

The interest charged on U.S. 10-year Treasury notes has fallen from nearly 16% in 1981 to roughly 2% today despite an explosion in government borrowing. This decline has made it easier to finance deficit spending such as Trump’s 2017 tax cuts that were meant to achieve stronger growth over the long term.

Still, the interest rates being charged on 10-year debt are higher for the United States than for other countries such as Britain (0.74, France (-0.07%), Germany (-0.32%) and Japan (-0.14%).

So, why is that?

One clear reason is that growth is anemic in those countries.

According to data provider FactSet, the U.S. economy is expected to grow significantly faster than the economies of Britain, France, Germany and Japan. The market and the central banks judge that those countries need the stimulus from rates that are close to zero, or even negative.

Still, investors believe the U.S. economy also needs a boost because the benefits of Trump’s tax cuts have waned and uncertainty over the administration’s trade battles with China and other nations. They expect a rate cut at the Fed’s July meeting — a sign that lower rates might be needed to keep the economy on course rather than propel it faster.