Five things to know about Trump's war on the Fed

WASHINGTON (Reuters) – With US stocks well below record highs in September and key elections held in less than two weeks, President Donald Trump has stepped up his criticism of rising interest rates in the US. Federal Reserve and Jerome Powell, the man he chose. lead the central bank.

Here are some key questions about Trump's verbal attacks.

What are Trump's criticisms of the Fed?

Trump said the Fed was raising rates too quickly, easing economic stimulus from lower taxes and deregulation, and making life harder for his government, while tariffs stemming from the US trade war with China and other countries were starting to hurt.

In an interview this week in the Wall Street Journal, Trump also complained that the Fed, which raised rates regularly during his tenure after keeping them close to zero during most of the two mandates of the former President Barack Obama, makes the task more difficult for the government. United States to repay its debt.

Is there any evidence that the Fed is hindering the economy?

It is true that higher rates will eventually cool the economy, which posted annualized growth of 4.2% in the second quarter, double its estimated potential. Many Fed policymakers expect higher borrowing costs to begin to dampen growth after two or three more rate hikes. Financial conditions were generally tense and unemployment reached its lowest level in 49 years, even as the Fed raised rates three times under Powell. (Graphic: Trump's war on the Fed – tmsnrt.rs/2PlZ6jb)

What can Trump do to influence Fed policy?

Indirectly, the US President can gradually change the composition of the board of directors by making successive appointments, choosing candidates for lower rates and a more flexible policy. However, the board members appointed by Trump have so far largely sided with Powell. Trump has nominated three more candidates to fill the remaining seats on the Fed's board of governors. Two of them – Michelle Bowman, the banking regulator of Kansas, and Nellie Liang, former employee of the Fed – do not have strong preferences in terms of rate policy, while a third, Marvin Goodfriend , from Carnegie Mellon University, is widely viewed as a supporter of higher rates.

Trump does not have a say in the appointment of regional Fed presidents, who control five of the nine current votes on Fed policy. They would control five of the 12 votes once all seats on the Fed board are filled.

Trump might try to fire Powell "for cause" under the Federal Reserve Act, although previous court decisions involving other agencies indicate that disagreements over a policy would not meet such a standard. A long-term option, given how worrisome the financial markets would be, would be to convince Congress to amend the law to allow the Fed chairman to be fired more easily.

Have other American presidents criticized the Fed and is it pushing for it to change course and with what effect?

In recent decades, US presidents have taken a nonchalant approach to Fed policy, but some in the more distant past have sometimes expressed dissatisfaction or impatience with the central bank. George W. W. Bush blamed his election defeat in 1992 to Alan Greenspan, then Fed President, and Lyndon B. Johnson clashed with Fed chief William McChesney Martin to raise rates in 1965.

Political scientist Sarah Binder, of George Washington University, who has published a book on the Fed's relations with elected officials, said that while Trump's tweets and media attacks attract a lot of attention, they do not meet the personal requirements of the presidents of the 1960s and 1970s formulated by the Fed. the Chiefs.

Perhaps more significantly, President Richard Nixon replaced Martin by Arthur Burns, who gave in to pressure from the White House for low interest rates, which is widely regarded as a political error that fueled a galloping inflation.

What is the Fed's reaction and what are the risks of Trump's attacks?

So far, Trump's verbal rescues have had no discernible impact on the Fed, which sticks to its plan to gradually raise borrowing costs to levels it considers more appropriate for an economy in healthy and growing. One of the risks is that, if Trump persists in his criticism, investors may begin to wonder if the Fed will continue to hold the ground, creating uncertainty about the direction of US monetary policy and likely to undermine the market confidence.