The big risk of Donald Trump's will to keep interest rates low

The Governor of the Bank of England suffered, as he surely expected, fierce personal attacks from Brexit supporters after the Bank's latest report on financial stability and stress tests, published on wednesday, sketched out some apocalyptic scenarios – not forecasts – for the British economy in the case of a Brexit without agreement next year.

Yet there is another central banker in the world who would gladly exchange seats with Mr. Carney.

While the governor had to endure abuses from backbenchers, his American counterpart, Jay Powell, had to accept criticism from its author, Donald Trump.

On Wednesday night, while Mr. Carney was being questioned about the stability report, Mr. Powell seemed to be moving away delicately from a gun that the US president had pointed at the head.

The president of the US Federal Reserve told the New York Economic Club that the central bank's key rate was now "just below" a neutral level at which it neither increases nor decreases. slows the rate of growth of the US economy.

This marked a significant change from the comments made by Mr. Powell last month only, when he stated that rate was still a "long way" of a neutral level, which had prepared Wall Street to expect further rate hikes in the coming months.

The Fed has so far raised its interest rates three times this year, the latest in September, raising its key rate, the federal funds rate, to a range of 2-2.25%. . Investors are preparing for a further increase next month.

So what has changed? These are not the prospects for the US economy which, while expecting a slowdown in growth in 2019, continues to grow at a rate sufficient to justify a further rise in the cost of the economy. loan.

No, Mr. Powell flinched at some of Mr. Trump's unpleasant personal attacks.

When stock markets tumbled last month, Trump accused the Fed of "crazy" and "loco" for raising interest rates too quickly.

In late October, he intensified his attacks by stating in the Wall Street Journal: "For me, the Fed is the biggest risk [to the US economy] because I think interest rates are rising too fast. "

Mr. Trump added, "I'm not happy what he's [Mr Powell] does it all … it almost looks like it's happy to raise interest rates. Whenever we do something big, it raises interest rates. "

Then on Tuesday, just one day before Powell's speech, the president told the Washington Post, "I think the Fed is a much bigger problem than China, and for now I'm not at all happy. I do business and I'm not accommodated by the Fed They make a mistake because I have a gut and that my gut sometimes tells me more than the brain of someone d & # 39; Another can never tell me. "

He added: "Up to now, I'm not even a little happy with my selection of Jay."

Faced with this barrage of criticism, Mr. Powell seems to be adopting a more dovish line, which is why all major US stock indexes rose sharply Wednesday night. The S & P500 rose 2.3%, the Dow Jones Industrial Average 2.5% and Nasdaq 2.95%.

The Fed enjoys a unique position in the US government. Although it is a branch of government, whose president is appointed by the president, it is subject only to a certain degree of congressional control. This means crucially that investors and markets consider it independent.

The three immediate predecessors of Mr. Trump – Barack Obama, George W Bush and Bill Clinton – have taken care not to criticize the Fed presidents of their time. On the contrary, they sometimes lavished too much praise on them.

And when presidents criticize the Fed, they do it only once they leave office. In 1998, George HW Bush had declared that he had blamed Alan Greenspan, the former Fed chairman, for his defeat against Mr. Clinton in 1992 because he had not reduced rates enough. of interest in 1990 and 1991.

He said about Mr. Greenspan, who was originally named by Ronald Reagan in 1987: "I have renamed him and he has disappointed me."

You have to go back almost half a century to find a president who has threatened the independence of the Fed to the extent of Mr. Trump. In 1970, Richard Nixon refused to renew the term of William McChesney Martin, president of the oldest Fed in its history and famous for his observation that the Fed's job is to "take the bowl of punch just when the party is getting ready. "

Nixon, who blamed rising unemployment for his defeat in the 1960 presidential election while he was vice president, replaced him with Arthur Burns. He then lobbied Burns to keep interest rates low in the hope that unemployment would remain low during the run-up to the 1972 presidential elections. Burns has been consistent. Unfortunately, in 1973, the oil crisis erupted, leading to double-digit inflation for the United States. Unemployment rose and growth stagnated.

That's what makes all of Mr. Trump's attacks against a man that he named only in November of last year deeply troubling. If the Fed is discouraged from keeping rates too low for too long, it will likely result in a surge in inflation and interest rates that will need to be aggressively tackled to combat it, putting at risk the growth and unemployment.

Also disturbing is that Mr. Trump is not alone in this behavior. Recep Tayyip Erdogan, the Turkish president, recently lobbied the Turkish Central Bank for it to keep interest rates down, which the bank, to his credit, refused to do. And Narendra Modi, the Indian prime minister, recently launched a series of attacks against the Reserve Bank of India to raise interest rates too quickly.

Everything seems very far from the period, just after the global financial crisis, when central bankers were proclaimed the new rock star.