Fed Will Do What Trump Wants, But Not Because He Wants It

(Bloomberg Opinion) -- Federal Reserve officials are adamant that President Donald Trump’s abuse won’t lead them to alter course. They are right, but not because the Fed’s independence is inviolable.

Recent data and a long-awaited debut speech this week by a top Fed official point the way. The Fed hasn’t been in a rush to lift interest rates, and there is little reason to scurry, with the economy’s long expansion slowing and markets turning volatile. One could even read Vice Chairman Richard Clarida’s remarks as slightly dovish, flapping further away from prolonged rate increases.

First, the data: The American economy cooled a bit last quarter, a slight slackening in growth that was widely anticipated. The 3.5 percent increase in gross domestic product was down from the rapid-fire 4.2 percent of the preceding three months. Fine; it had to calm down. Let’s be clear: 3.5 percent is still good.

Together with a collection of anecdotes from Fed district banks and pliant inflation, things look to be coming off the boil just nicely. The central bank’s work is just about done, regardless of any tantrums from the Oval Office. Trump is irrelevant in the Fed’s decision making. It’s going his way anyway.

Clarida’s first speech since the Senate confirmed him came close to nodding in this direction, both in what he said and what he omitted. The labor market can strengthen further — the jobless rate is already a powerful 3.7 percent — without boosting inflation.

He reassured investors the Fed won’t overdo it: “If strong growth and employment gains were to continue and be accompanied by stable inflation, inflation expectations, and expectations for Fed policy, that situation, to me, would argue against raising short-term interest rates by more than I currently expect.”

He almost sounded relaxed about inflation. Absent was any reference to the central bank being “a long way from neutral,” as Chairman Jerome Powell said in a discussion with Judy Woodruff at a Washington conference earlier this month. Taken literally, Powell’s comments would have indicated a lot of work ahead, rather than three or four rate increases required to reach a roughly neutral point. His riff unnerved the bond market.

Clarida did say rates were below the longer-run neutral rate that neither charges growth nor crimps it. But we knew that. The Fed’s own projections in September hinted that one gauge of neutral was 3 percent. The benchmark rate is now in a range of 2 percent to 2.25 percent. It’s what Clarida didn’t say; Powell’s “long way” construction seems to have been quietly shelved.

The GDP report had some flaws. Trade was a drag, likely reflecting tussles between the U.S. and China. The housing component was weak, and capital spending could have been better. And there are the shaky markets, which on the face it, suggest all isn’t rosy.

Markets are fickle, though. And GDP data gets revised, sometimes by a lot. This week’s estimate is the first of three. There’s also a vocal camp that just doesn’t like GDP as a measure of the economy, whether the numbers point to heaven or hell.

Let’s put it this way: For Trump, for the Fed, for the U.S. economy — there’s more to like than dislike as the week draws to a close.    

To contact the editor responsible for this story: Philip Gray at philipgray@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss writes and edits articles on economics for Bloomberg Opinion. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

©2018 Bloomberg L.P.