Trump Roars, Fed Yawns and Markets Bet on Powell's Credibility
(Bloomberg) -- President Donald Trump’s 24-hour bashing of the Federal Reserve is unlikely, for now, to shake the central bank’s standing among its two key constituencies that matter more: financial markets and Congress.
“If anything, the Fed has been gradual and their actions have been well received thus far,” said Vincent Reinhart, chief economist at Standish Mellon Asset Management Co. and a former Fed official. “To criticize what the Fed has done is out of line with how the market has reacted to what the Fed has done.”
Trump on Wednesday said “the Fed has gone crazy” with interest-rate increases this year and doubled-down on Thursday, blaming the nation’s “out of control” central bank for a sixth straight day of losses in U.S. equities. Still, he said, “I’m not going to fire him.”
The president’s broadside is a direct challenge to the Fed’s three-decade-long campaign to build and maintain its credibility fighting inflation, an effort that has helped produce the two longest U.S. economic expansions on record. After the barrage of complaints from Trump in the past 24 hours, financial markets don’t see Fed Chairman Jerome Powell bending to the pressure to slow rate hikes and risk an inflation outbreak.
A market-based gauge of the annual U.S. inflation rate for the next decade -- the 10-year breakeven rate -- declined this week to 2.13 percent from close to a four-month high of 2.17 percent reached last week.
Trump’s politicking with interest rates has the potential to backfire. Inflation credibility is the foundation of modern monetary policy partly because it gives investors confidence in, and predictability about, the future. Lose that credibility to keep prices in check and bond investors look to sell, pushing up borrowing costs and slowing the economy.
For a president who has frequently invoked rising stock prices as affirmation for his economic policies, criticism of the Fed lays ground for shifting blame elsewhere if the market slide continues. He’s escalating his attacks less than a month before elections that will determine whether Republicans maintain control of Congress.
Under the guidance of Powell, Trump’s pick to lead the central bank, and his predecessor Janet Yellen, Fed officials have raised rates six times since Trump’s inauguration in January 2017. They’ve also signaled their intent to hike again in December and three more times next year, assuming the economy continues to grow moderately and inflation stays in check.
Markets have taken each hike in stride, including the most recent rate increase on Sept. 26.
Atlanta Fed President Raphael Bostic on Wednesday repeated what’s become a mantra for Fed officials when asked about Trump’s remarks, saying, “at the end of the day we have to do what we think is best. That is what I try to do.”
Fed spokeswoman Michelle Smith declined to comment on the president’s remarks.
Ward McCarthy, chief financial economist at Jefferies LLC in New York, said Trump’s comments wouldn’t influence Fed policy making. “The Fed is going to do what the Fed thinks it needs to do, Trump’s criticisms notwithstanding,” he said.
He also said he thought the attack was aimed simply at deflecting blame for the stock market rout in the run-up to November elections, and was likely not part of any larger strategy to undermine the Fed’s independence.
“The Fed has a dual mandate, but one of its unspoken roles is to be the scapegoat,” McCarthy said. “As soon as the elections are over, he’s going to forget about the Fed and focus on other things.”
Trump has little recourse if he wants to make any radical change. He can’t remove Fed governors, including Powell, except for cause, and the Senate must confirm replacements.
Legal oversight of the Fed lies with Congress, where Powell has been busy bolstering relations on both sides of the political aisle. Moreover, Republicans who have criticized the Fed in the past and agitated for legislation that would do much more to threaten the Fed’s independence, are unlikely to align themselves with Trump on this issue. Republican critics tend to want the Fed to raise rates more quickly, not more slowly.
Fed watchers have also noted that the president’s barbs don’t fit with his own administration’s posture with respect to the Fed.
Trump’s most direct way of influencing monetary policy is through appointments. But there is little sign that he is trying to do that. The appointments have been carefully selected by White House staff with an eye toward institution-building.
Trump appointed two monetary policy experts: Richard Clarida, who has been confirmed by the Senate as a Fed governor and vice chairman, and Marvin Goodfriend, a Carnegie Mellon University professor and nominee for governor who hasn’t been confirmed. There are two Trump Fed picks with Wall Street experience, Randal Quarles, the vice chairman of supervision, and Powell. Another Trump pick for the Fed Board is Michelle Bowman, the Kansas banking commissioner who has yet to be confirmed. The president also selected Nellie Liang, a former Fed division director who is a Ph.D. economist with expertise in financial stability.
“If you’re going be worried about a White House that was going to try to politicize the Fed, then you can think of other people that they might put there besides the people that we choose,” Kevin Hassett, chairman of the White House’s Council of Economic Advisers, said at the Council on Foreign Relations on Oct. 9. “We have to 100 percent respect the independence of the Fed at all times.”
Nonetheless, some see growing risks for the central bank amid the Trump assault.
“A lot of the Fed’s power is in perceptions,” said Diane Swonk, chief economist with Grant Thornton in Chicago. “Credibility is extremely important to the central bank and anything that threatens its credibility is a problem.”
Stanley Fischer, the former Fed vice chairman, worried in an Oct. 3 interview that Trump’s pressure could have a subtle impact on policy.
“If somebody is pushing on you every day, it may affect you,” Fischer said in an interview with BNN Bloomberg. “But it won’t be, ‘you shouldn’t raise the interest rate’ and they don’t raise the interest rate. That won’t happen.”
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