President Trump’s criticism of the Federal Reserve is posing a challenge for Chairman Jerome Powell as he attempts to navigate the economy through potentially turbulent waters ahead.
Trump has publicly bashed Powell for raising interest rates as unemployment lingers near record lows and U.S. economic growth picks up at a higher rate. The president worries the Fed’s gradual rate hikes will hinder the economy as he pushes for new trade terms with economic partners.
{mosads}“Tightening now hurts all that we have done,” Trump tweeted Friday. “The U.S. should be allowed to recapture what was lost due to illegal currency manipulation and BAD Trade Deals.”
Powell, whom Trump chose to take over the central bank, already faces a delicate balancing act as the Fed tries to maintain strong economic growth without sparking rampant price increases or financial market bubbles.
Trump’s attacks also come with the bank under intense political scrutiny from both sides of the aisle — including from conspiracy theorists questioning its motives and allegiances.
Powell has tried to demystify the Fed and be a more accessible face, speaking to reporters more frequently and avoiding complicated economic jargon.
He said he feels no pressure from Trump or the White House to veer away from rate hikes, and the vast majority of GOP lawmakers would prefer him to stay the course.
The chairman, a Republican, was first
appointed to Fed in 2012 by former President Obama and is widely respected by both
parties.
But by targeting the Fed ahead of the
midterm elections, Trump is complicating Powell’s policies and his efforts to restore the bank’s reputation.
“The Fed’s an easy scapegoat when you’re not doing your own job as well,” said Diane Swonk, chief economist at Grant Thornton. “The president may or may not like what’s going on, but that’s why the Fed is independent.”
Trump is not the first president to butt heads with the Fed, which was designed by Congress to be independent from political influence. Former Presidents Truman, Johnson, Nixon and George H.W. Bush all battled with their Fed chairman — often privately, but sometimes publicly.
Presidential pressure has occasionally led to economic hardship. Economists often cite Nixon’s pressure on then-Chairman Arthur Burns to keep interest rates low as one of the causes of stagflation, which devastated the U.S. economy.
Swonk said presidents have frequently “gotten angry when the Fed has gone from benign to biting,” typically when the bank raises interest rates, but “they’ve learned their lesson.”
Former Presidents Clinton, Obama and George W. Bush refrained from publicly rebuking the Fed. Trump dismissed that
standard last week, when he said he was “not thrilled” about Powell’s planned rate hikes.
Trump acknowledged that his comments broke with the standard set by recent presidents but said he didn’t care about the criticism it would provoke.
“I’m just saying the same thing that I would have said as a private citizen,” Trump said. “So, somebody would say, ‘Oh, maybe you shouldn’t say that as president.’ I couldn’t care less what they say, because my views haven’t changed.”
Trump had also slammed former Fed Chairwoman Janet Yellen on the campaign trail, claiming she was trying to help Obama.
“Obviously what Trump said flies in the face of everyone’s standards when it comes to what you can say about the Fed,” said Daniel Alpert, managing partner at investment firm Westwood Capital.
The Fed has regularly landed in political crosshairs due in part to its legal requirement to restrain the economy when conditions threaten price stability. The central bank’s historic and complex jurisdiction had also fostered confusion and concern among the American public.
Powell has tried to open up the Fed and make the bank more approachable with plain-spoken analyses of the U.S. economy and a pledge to speak to reporters monthly in 2019.
The chairman has also met with lawmakers more frequently than Yellen, whom Republicans frequently criticized for refusing to raise interest rates faster under Obama. A report from The Wall Street Journal said that Powell had met with 18 lawmakers, 10 Republicans and eight Democrats, in his first four months in office.
That goodwill could come in handy if the president keeps up his hits.
“We’ve had periods in the past when there were conspiracy theories about black helicopters hovering over the Fed, sending it secret messages about how to destroy the U.S. and make Wall Street rich,” said Karen Petrou, managing partner at Federal Financial Analytics. “It’s always got a challenge to prove its political legitimacy.”
Trump’s feud with the Fed, like those of his predecessors, rests on the conflict between the president’s political desires and the central bank’s dual mandate of stable prices and low unemployment.
Keeping interest rates down could help drive unemployment to new lows while fueling further stock market growth. Low interest rates would also reduce the value of the U.S dollar. That would make American goods more competitive globally, accomplishing one of Trump’s top goals.
Trump’s preference for low rates could also boost topline economic numbers. Low interest rates typically spur job and investment gains, and Republicans are eager to tout a strong economy ahead of the November midterm
elections.
Powell and the Fed, however, are legally mandated to look further down the road.
The Fed is trying to raise interest rates back to a neutral level as the recovery from the 2008 recession nears its expected end. Failing to do so could limit the Fed’s power to blunt the impact of the next economic downturn.
The Fed could also spur rampant price increases and unstable financial markets, two potential triggers for a recession, if it doesn’t raise interest rates as the economy expands. The bank has raised interests rates twice under Powell, and it is projecting two more hikes before the end of 2018.
Fed watchers insist the pressure from Trump likely won’t move Powell and say the bank is committed to its independence.
Most conservative economists and Republicans also support further rate hikes, making Trump a minority in his own party.
Trump also has three Fed nominees pending before the Senate that would likely support raising rates, giving Powell more backup on the Fed board.
Petrou said the Fed board “will stand unquestionably united with Powell” to defend the bank’s independence because it’s “just the nature of the Fed.”
“They make very objective decisions based on the criteria at which they look,” Petrou said. “If they see what they need to do, they will do it.”
Some worry that Powell could become a scapegoat if the economy does go south. For now, though, the Fed chief is ignoring Trump’s public barbs and pushing ahead with his work.
“The upshot is that this is not the first time that an administration had evidenced its displeasure,” said Alpert.