The Fed Should Ignore Trump and Raise Rates

(Bloomberg Opinion) -- Most economists, according to a Bloomberg poll, agree with investor expectations that the Fed will raise interest rates another notch on Wednesday. Just before the Fed’s two-day meeting began, on Tuesday, President Trump urged it to avoid making “yet another mistake” and to leave rates where they are.

The president’s meddlesome comments are unhelpful, because the central bank can’t afford to be seen as being swayed by tweets from the White House. Nonetheless the overriding factor should be the state of the economy. Whatever the president may think, if you stick to the fundamentals, another small rise in interest rates is warranted.

Granted, the balance has been shifting in recent weeks. The economy is still growing at a respectable pace nearly 10 years into the current expansion; unemployment is low, perhaps unsustainably low, at 3.7 percent of the labor force; and wage growth is showing signs of life. On the face of it, these conditions speak of an economy at full capacity and don’t square with the current benchmark interest rate of just 2.25 percent.

On the other hand, core inflation has ticked down slightly: It stands at 1.8 percent, just below the Fed’s target of 2 percent. The lower price of oil is helping to suppress broader measures of inflation. A strong dollar and the recent drop in equity prices constitute a tightening of financial conditions in their own right. All this pushes the other way.

A respectable case can be made for pausing. Investors already expect a slower rate of monetary tightening next year than they’d penciled in a month or two ago – rightly, in view of changing conditions. But consider the larger picture: With the economy at higher-than-full employment (according to standard estimates), monetary policy should no longer be delivering additional stimulus. A Fed funds rate of 2.5 percent – a quarter-point higher than now – would lie at the bottom of the range of “neutral” interest rates (neither adding to nor subtracting from demand), according to the Fed’s estimates. That seems about right for now.

What about Trump’s unsolicited advice? Sadly, central banks have to worry about perceptions as well as facts, and analysts and commentators are always determined to find hidden motives and meanings, whether or not they exist. Last month, Fed Chairman Jerome Powell was interpreted as signaling a more dovish approach to monetary policy, even though his market-moving comments conveyed no real new information.

This zeal for over-interpretation means that any trace of deference to the president’s views on monetary policy is best avoided. The good news is that, for now, the Fed’s reputation is secure: The Bloomberg poll found that almost 90 percent of economists think Trump’s criticisms will influence the Fed “not at all” — a fine tribute to the Fed’s credibility (and to the president’s lack of it).

In the end, it isn’t complicated: The Fed should ignore the president’s directions and be seen to ignore them. Whatever its interest-rate decision this week, the Fed should make clear that it was guided by economics, not politics.

Editorials are written by the Bloomberg Opinion editorial board.

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