Trump renews attacks on Fed, putting central bank in a bind

US President Donald Trump, in an interview on CNBC, said the Fed "made a big mistake: They raised interest rates far too fast."
US President Donald Trump, in an interview on CNBC, said the Fed "made a big mistake: They raised interest rates far too fast."PHOTO: AFP

WASHINGTON (NYTIMES) - President Donald Trump renewed his criticism of the Federal Reserve on Monday (June 10), saying the Fed erred in lifting interest rates last year and put the United States at a disadvantage to China.

Trump, in an interview on CNBC, said the Fed "made a big mistake: They raised interest rates far too fast."

The president also seemed to lament that the Fed, which is independent of the White House, did not operate like China's central bank, which is largely subservient to the government.

"The head of the Fed in China is President Xi," Trump said in the interview, asserting that "he can do whatever he wants". Trump has repeatedly attacked the Fed's decision last year to raise interest rates, accusing it of undermining his economic policies and slowing growth. And he has urged the Fed to cut rates and take additional steps to stimulate economic growth.

His latest rebuke comes at a pivotal moment. The Fed has paused its steady march toward higher rates and begun re-orienting policy toward potential cuts amid slowing growth.

Markets now expect the Fed to cut rates within the next two months. Futures pricing suggested that a cut by the end of July is now about 84 per cent priced into markets, up from less than 20 per cent a month ago.

But Trump is putting Fed Chairman Jerome Powell and his colleagues in a difficult spot. The president's ongoing trade war with China - including his threat to slap tariffs on virtually all remaining Chinese imports if no agreement is reached - is creating uncertainty, causing businesses to put off investment and hiring.

 
 

If it intensifies, the economic drag might be enough to prompt Fed rate cuts.

But by lowering borrowing costs, the central bank would be giving Trump exactly what he wants, creating a risk that it would look political even though it was acting on economic fundamentals.

The president has been particularly critical of the Fed's policies in the context of his trade war. Trump has said that China devalues its currency, making its goods cheaper to buy and putting the United States at a disadvantage.

"They devalue their currency," Trump said. "They have for years. It's put them at a tremendous competitive advantage, and we don't have that advantage because we have a Fed that doesn't lower interest rates. We should be entitled to have a fair playing field, but even without a fair playing field - because our Fed is very, very disruptive to us - even without a fair playing field we are winning."

Before adopting its current cautious stance, the Fed had raised rates nine times since late 2015, with four of those coming after Trump nominated Powell to lead the central bank. It has also been shrinking its large balance sheet of government-backed bonds - which it amassed in the wake of the financial crisis to help prop up the economy - though it is in the process of slowing and stopping the drawdown.

Trump seemed to blame Fed policy partly on personnel. He has nominated four of the Fed's five board members in Washington, but boards at the 12 regional central banks select their leaders. In total, 13 of the 17 people sitting around the policy-setting table were not selected by the White House.

He said in the interview that the Fed had not listened to him and that "they're not my people". All four of the Fed governors he selected voted in favour of rate increases last year, including Powell, Richard Clarida, Randal Quarles and Michelle Bowman.

The Fed operates independently of the White House by design, so that its officials are free to make decisions that could cause short-term pain but are better for the nation's long-term economic health.

The president's regular attacks on the central bank break with a decades-old tradition of respecting that independence.

Still, Fed officials regularly say that they will set policy with an eye toward achieving their two goals, stable inflation at around 2 per cent and maximum employment, without paying attention to political commentary.

Powell and his colleagues have opened the door to potential rate cuts in recent weeks, saying that the Fed will set policy as appropriate to support its employment and inflation goals.

That's not an explicit sign that a move is coming, but it puts investors and economists on watch for a cut in coming months, especially as uncertainty surrounding Trump's trade negotiations with China lingers. Inflation was already running below the Fed's goal, and an employment report released last week showed a sharp slowdown in hiring, further stoking those expectations.