Trump’s Fed Bashing Could Backfire by Stiffening Rate-Hike Resolve
(Bloomberg) -- President Donald Trump’s extraordinary broadside against the Federal Reserve on Thursday may end up getting him exactly what he doesn’t want: higher interest rates.
Confronted with a burst of presidential pressure not seen for decades to keep monetary policy easy, Fed Chairman Jerome Powell and his colleagues on the Federal Open Market Committee may feel more inclined to demonstrate their political independence and hike rates when facing a close decision.
“The president’s comments may skew the committee in a hawkish direction,” Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., wrote in a note to clients following Trump’s criticism of the central bank in an interview on CNBC. “If a decision is a close call, then the appearance of kowtowing to the president may bias them toward raising rates.”
Trump told CNBC that he was “not thrilled” with the Fed over rate hikes. “I don’t like all of this work that we’re putting into the economy and then I see rates going up.”
On a softer note, Trump added, “I am not happy about it. But at the same time I’m letting them do what they feel is best.” Trump also called Powell, who he appointed to succeed Janet Yellen, “a very good man.” White House spokeswoman Lindsay Walters later said in an emailed statement that the president “respects the independence of the Fed.”
Lawrence Summers, the former Treasury Secretary, and Adam Posen, president of the Peterson Institute for International Economics, both echoed Feroli’s comments in social media posts in the aftermath of the interview.
“Likely result of presidential intervention is higher rates as Fed needs to assert its independence,” Summers tweeted.
The Fed has raised rates five times since Trump took office in January 2017, and has penciled in two more hikes for this year. It’s also scaling back the support its providing the economy by gradually reducing its holdings of Treasury and mortgage-backed bonds.
There’s little evidence the Fed’s tightening is constricting the second-longest U.S. economic expansion on record: The unemployment rate under Trump has fallen to 4 percent, from 4.8 percent the month he was sworn in, and some economists predict gross domestic product last quarter expanded by more than 4 percent -- about double the pace in the first three months of the year.
Trump’s rebuke broke with more than two decades of White House tradition of avoiding comments on monetary policy out of respect for the independence of the U.S. central bank.
The dollar relinquished gains from earlier in the day and Treasury yields dropped following the president’s remarks.
“The Fed’s independence from short-term political pressures is critical to enabling it to take the longer-run perspective that is essential for achieving its legislated dual mandate for jobs and price stability,” said Donald Kohn, a former Fed vice chairman who is now a senior fellow at the Brookings Institution in Washington.
Fed spokeswoman Michelle Smith declined to comment. Powell, who goes by “Jay,” last week told American Public Media’s “Marketplace” program that the Fed has “a long tradition here of conducting policy in a particular way, and that way is independent of all political concerns.”
Trump is limited in how much direct pressure he can put on the Fed chief. Nominated by Trump and confirmed by the Senate with broad bipartisan support, Powell has a four-year term as chairman that ends in 2022. According to the Federal Reserve Act, a Fed chairman, or any Fed governor, can only be removed from office before his or her term ends “for cause,” which isn’t defined.
Powell, perhaps wary of provoking the ire of the president, has also been particularly careful in press conferences and congressional testimony when asked to comment on Trump’s tax and trade policies. “I’m really firmly committed to staying in our lane, and, you know, our lane is the economy,” he told the Senate Banking Committee on Tuesday.
“He’s really gone out of his way not to make himself a political target, a pinata,” said Diane Swonk, chief economist of Grant Thornton LLP in Chicago.
It’s long been speculated that the taboo of commenting on U.S. monetary policy could change under Trump, who slammed the Fed during his election campaign and has demonstrated repeatedly his willingness to flout the conventions and sensibilities of establishment Washington.
It wasn’t the first time in history the Fed has faced pressure from a U.S. president. But the past three administrations under Bill Clinton, George W. Bush and Barack Obama have refrained from publicly commenting on policy decisions.
The last known example of U.S. presidential strong-arming came when George H. W. Bush was fighting for re-election. Bush’s White House pushed Alan Greenspan behind the scenes on rates and openly called on the Fed to lower its benchmark in June 1992. Greenspan did lower rates 13 times over 1991-92, but slowed the pace of cuts in the latter year, much to the White House’s annoyance.
“I’m completely confident that the Federal Reserve under Jay’s leadership will continue to do what is necessary to achieve its legislated objectives, just as Alan Greenspan did when the Bush 41 administration was so publicly unhappy with the Fed’s actions,” said Kohn, a 40-year veteran of the Fed who served under Greenspan.
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