U.S. President Donald Trump speaks at an event at the White House in Washington. (Photographer: Yuri Gripas/Bloomberg)

Trump Criticizes the Fed, Breaking Another Taboo

(Bloomberg Businessweek) -- After the stock market swooned in early February, I predicted difficulties for the Federal Reserve. “If this turns out to be more than a shudder,” I wrote, President Trump “may start looking for someone to blame. And that someone could be Jerome ‘Jay’ Powell, who was sworn in as Fed chairman on Feb. 5.”

The warning was premature. The stock market bounced back, and the U.S. economy has continued to perform well. That seemed to keep Trump at bay. Now, though, Trump is going after Powell even without any indication that interest-rate hikes by the Federal Reserve are harming growth.

In an interview with CNBC that was aired in part today, Trump called Powell, whom he chose for the job, “a very good man.” But he said, “I’m not thrilled” about the Fed’s rate hikes. The Fed has raised interest rates twice this year and has signaled two more increases by the end of 2018. Said Trump: “Because we go up, and every time you go up, they want to raise rates again. I don't really—I am not happy about it. But at the same time, I’m letting them do what they feel is best.”

This is the first time Trump has criticized Powell’s performance, but it’s probably not the last. As everyone including Attorney General Jeff Sessions and former Secretary of State Rex Tillerson can attest, once Trump starts in on one of his picks, he is as persistent as a dog worrying a bone.

Trump said he was aware that there’s a tradition of presidents not criticizing the central bank, but it’s not stopping him. “Now I’m just saying the same thing that I would have said as a private citizen,” he told CNBC. “So somebody would say, ‘Oh, maybe you shouldn’t say that as president.’ I couldn’t care less what they say, because my views haven’t changed.”

It’s worth reviewing why presidents usually refrain from criticizing the Fed. It’s not out of politeness. It’s because they understand that in the long run, the central bank will succeed only if the financial markets trust it to keep inflation under control—even if that means taking away the punch bowl just as the party gets going. If owners of bonds fear that the Fed will let inflation get out of hand, they will panic and sell their bonds, knowing that inflation damages the value of fixed-income securities. When bond prices fall, their yields rise. Interest rates will rise throughout the economy, damaging economic growth.

There’s another way rates could go up. To maintain its credibility with the financial markets in the face of an attack from the White House, the Federal Reserve could raise the federal funds rate more than it otherwise would—showing it won’t be pushed around.

To summarize: When Trump agitates for rates to stay low, he could inadvertently start a chain of events that causes rates to rise. That would be the latest self-inflicted wound for a president who has a remarkable tendency to damage his own cause.

To contact the editor responsible for this story: Eric Gelman at egelman3@bloomberg.net

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