By breaking with a 25-year tradition and criticizing Federal Reserve officials for raising interest rates, President Donald Trump has put Fed policymakers in a no-win position that could jeopardize the economic expansion.
Paul Davidson of USA Today had the news:
Other economists are downplaying Trump’s remarks, noting that Fed Chairman Jerome Powell is unlikely to be influenced by them and the central bank is an independent agency that has other safeguards designed to insulate it from political pressure.
In a CNBC interview scheduled to air Friday morning, Trump said, “I’m not thrilled” with the Fed’s rate hikes. “Because we go up, and every time you go up they want to raise rates again. I don’t really – I’m not happy about it. At the same time I’m letting them do what they feel is best.”
The Fed’s policymaking committee has raised rates twice in 2018 and forecast two more bumps this year and three in 2019. The Fed boosts rates to tamp down economic activity and head off a spike in inflation. But the strategy can make stocks less attractive, and lifting rates too rapidly can trigger a recession.Powell and other Fed policymakers almost certainly will not allow themselves to be consciously influenced by Trump’s comments, says Peter Conti-Brown, a professor of legal studies and business ethics at the Wharton School in Philadelphia.
Jeff Cox of CNBC.com reported that markets fell as a result of the comments:
Markets reacted to Trump’s comments, with stocks, the dollar and Treasury yields all falling.
Fed officials did not comment on the president’s remarks. The White House, in a statement after the interview excerpt aired on CNBC, emphasized that Trump did not mean to influence the Fed’s decision-making process.
“Of course the President respects the independence of the Fed. As he said he considers the Federal Reserve Board Chair Jerome Powell a very good man and that he is not interfering with Fed policy decisions ” the statement said. “The President’s views on interest rates are well known and his comments today are a reiteration of those long held positions, and public comments.”
Bob Bryan of Business Insider reported that the comments could backfire:
The comments raised the specter of President Richard Nixon’s pressure on the Fed in the 1970s, which led to economically damaging stagflation. But JPMorgan economist Michael Feroli advanced an interesting alternate theory: Trump’s comments may inspire the Fed to go the other direction.
“Given what we know about Powell, we see little chance the President has gotten in his head,” Feroli wrote in a note to clients. “In fact, an argument can be made that the President’s comments may skew the Committee in a hawkish direction: if a decision is a close call then the appearance of kowtowing to the President may bias them toward raising rates.”
Put another way: The best way for the Fed to assert its independence is to do exactly the opposite of what Trump suggested.
Feroli also noted that the easiest way for Trump to bend the Fed to his political will would be to fill the Federal Reserve Board of Governors with members that agreed with a low interest rate policy or were personally connected to the president. Given Trump’s recent Fed picks, this doesn’t appear to be the case.