By Greg Ip

Historically, presidents wanted interest rates to go in only one direction: down.

As with so much else, Donald Trump breaks with that tradition. Early in the campaign he called himself a "low-interest rates person," but by the end he was warning that low rates were fueling a bubble, distorting markets and robbing savers: "Those people have really been discriminated against."

While Mr. Trump is no economist, he's articulating a view that's getting traction with economists and financiers: that even if superlow interest rates don't produce inflation, they can do more harm than good by distorting markets, redistributing wealth and fueling bubbles, and the Fed ought to abandon them. "We should look at whether Fed intervention in interest rates or credit markets distorts monetary signals, so that you get this false economy," said Judy Shelton, an author on monetary topics and adviser to Mr. Trump, in an interview.

Mohamed El-Erian, an adviser to the German insurer Allianz, says: "You don't get growth but you have the cost of higher wealth inequality and it's very visible."

This monetary heterodoxy is shared by other political leaders: British Prime Minister Theresa May has said the Bank of England's bond buying (known as quantitative easing) exacerbates inequality and Wolfgang Schäuble, the German finance minister, has blamed savers' unhappiness with low rates for fueling support for the populist Alternative for Germany party.

This isn't how most economists and central bankers think. They believe interest rates are low because the economy can't tolerate higher rates. Raising them to reward savers or prevent bubbles would exact a price in too-low inflation or more unemployment, they say.

The Fed has held its benchmark short-term rate since December in a range between 0.25% and 0.5%, and officials have indicated they expect to raise it very gradually in coming years.

Would Mr. Trump seek to nudge the Fed toward the new view via his nominations to its Board of Governors or by replacing Chairwoman Janet Yellen, whose term ends in February 2018?

If so, the result would be higher interest rates than otherwise. Some on Wall Street would welcome this: Bank profits would go up, for example. Whether it would be good for the economy is a different matter. If the current consensus is right -- that the economy can't live with rates much above low single digits -- hastening rate increases could backfire and endanger Mr. Trump's re-election. Almost certainly someone will point that out to him.

Mr. Trump has probably not given the issue much thought yet. Moreover, higher interest rates may be on the way regardless. Stock markets initially sold off on the news that the unpredictable Mr. Trump was winning, but then recovered thanks to an acceptance speech that didn't pick fights and called for more infrastructure spending.

If Mr. Trump indeed prioritizes infrastructure and tax cuts, financed with larger deficits, that's bullish for near-term growth. It would also be inflationary, since the economy is already close to full employment. If Mr. Trump keeps his promise to restrict trade and immigration, that would constrain the economy's supply side and add to the inflationary pressure.

That would prompt Mrs. Yellen and her colleagues to accelerate rate increases. The bond market may sense that: 10-year Treasury yields reached 1.96% Wednesday, the highest since March, apparently betting the burden of sustaining growth is shifting from monetary to fiscal policy, just ascentral bankers always hoped.

This seems premature. Mr. Trump hasn't even begun negotiating with Congress, and it isn't clear how stimulative a budget deal could be without inflating the federal deficit too much. Moreover, the Fed has no need to respond rapidly, since inflation is still below its 2% target.

Nonetheless, one should not ignore the political tea leaves. Dissatisfaction at central banks' aggressive monetary policy has been growing among conservative populists for years. One of them will soon occupy the White House. That's got to matter.

Write to Greg Ip at greg.ip@wsj.com

(END) Dow Jones Newswires

November 10, 2016 06:14 ET (11:14 GMT)

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