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WASHINGTON – President Trump's attacks on the Federal Reserve complicate a series of tough decisions by the central bank.
Fed officials said they were gradually raising interest rates to avoid overheating the economy and that political pressures would not influence their actions.
Fed Chairman Jerome Powell, and almost all of his colleagues, agree that rates remain low enough to spur growth at a time when the economy's strength does not need stimulus. But as they increase rates, they are increasingly uncertain about the distance that remains to be traveled and how to communicate their plans to the public.
Mr. Trump's rhetoric could reduce all close political demands in two ways.
If officials of the Federal Open Market Committee, responsible for setting rates, believe that their credibility with the markets would suffer, they could be favorable to higher rates, said several former senior officials of the Fed.
Trump's critics "are more likely than not to stiffen their backs," said Alan Blinder, vice president of the Fed from 1994 to 1996. "Many FOMC members will not want newspaper articles. do to Trump. "
On the other hand, if persistent attacks tarnish the credibility of the Fed, and thus its effectiveness, officials may be more reluctant to raise rates if the data sends conflicting signals.
"The recent episode of Trump's remarks is remarkable for its relentlessness, especially as it continues," said Derek Tang, an economist at LH Meyer Inc., an economic forecasting firm. "Powell could come to think that the cost of a new tightening is not just economic, but also political if any increases threaten the Fed's viability."
A spokeswoman for the Fed declined to comment on Tuesday. Powell said earlier this month that the Fed would not be influenced by political pressure. "We are simply trying to make the right medium and long term choice for the country," he said. "We do not let other things distract us."
Last month, the Fed raised its short-term key rate by 2% to 2.25% and has forecast four further quarter-point increases over the next year.
Trump's criticism opens a national debate about whether rate increases are justified now, at a time when economic growth is strong but inflation seems to be under control.
The unemployment rate, at 3.7%, is already below the level that most Fed officials see as consistent with stable inflation, arguing for higher rates to contain the pressures on prices.
Excluding food and energy price volatility, so-called core inflation rose 2% from the previous year in August, as measured by the Fed's preferred tonnage. This is the level that the central bank considers compatible with a healthy economy.
The Fed has enjoyed relative independence in policy-making because Congress has asked it to make sometimes unpopular decisions, such as raising interest rates.
Before Mr. Trump, the last president to have publicly called for the reduction of interest rates was George H. W. Buisson. He attributed part of his defeat in the 1992 election to the decision of Fed Chairman Alan Greenspan not to keep the rates low after the 1990-1991 recession.
The Clinton administration found that these attacks did not discourage the Fed. "Among other things, the president looked weak," said Donald Kohn, vice president of the Fed from 2006 to 2010. "[Mr. Bush] wanted something, and he could not get it. "
The Fed began raising rates in 1994, threatening to increase federal borrowing costs just after President Bill Clinton negotiated a hard-won deficit reduction agreement in Congress. "This is the last thing he wanted to see happen," said Yellen Monday, which Clinton appointed to the Fed's board on Monday.
White House advisor Robert Rubin has managed to convince Clinton not to pick on the Fed, saying such an effort would politicize the central bank and undermine confidence in economic policies. of the administration.
"Clearly, presidents can express their views and give their opinion on the policy," Yellen said. "But I do not think it's wise." She ended her four-year tenure as President of the Fed in February after Trump appointed Powell to succeed him.
The White House's attacks on the Fed could gain more weight if they were joined by members of Congress, as the Fed ultimately responds to Capitol Hill. It did not happen under Mr. Trump.
In recent television interviews, Trump's key economic advisors, including Treasury Secretary Steven Mnuchin, did not exaggerate his criticism of the Fed and expressed support for Powell. This suggests that his advisers are not eager to escalate a conflict with the central bank.
In addition, Trump did not seek to change the Fed's monetary policy by choosing the Fed's board, the president's main channel for influencing the central bank. He mainly appointed non-ideological policy experts.
"Trump's barking was far worse than his bite," said Blinder. "There was almost no bite."
Write to Nick Timiraos at [email protected]
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