Trump's remarks on Fed policy may backfire

They may boost Fed's rate-hike resolve if faced with close decision, to show autonomy

WASHINGTON • United States President Donald Trump's extraordinary broadside against the Federal Reserve on Thursday may end up getting him exactly what he does not want: higher interest rates.

Confronted with a burst of presidential pressure not seen for decades to keep monetary policy easy, Fed chairman Jerome Powell and his colleagues on the Federal Open Market Committee may feel more inclined to demonstrate their political independence and hike rates when facing a close decision.

"The President's comments may skew the committee in a hawkish direction," Mr Michael Feroli, chief US economist at JPMorgan Chase & Co, wrote in a note to clients following Mr Trump's criticism of the central bank in an interview on CNBC. "If a decision is a close call, then the appearance of kowtowing to the President may bias them towards raising rates."

Mr Trump told CNBC he was "not thrilled" with the Fed over its rate hikes. "I don't like all of this work that we're putting into the economy and then I see rates going up. I am not happy about it."

On a softer note, he added: "But at the same time I'm letting them do what they feel is best."

Mr Trump also called Mr Powell, whom he appointed to succeed Dr Janet Yellen, "a very good man".

White House spokesman Lindsay Walters later said in an e-mailed statement that the President "respects the independence of the Fed".

NOT HAPPY ABOUT RATE HIKES

I don't like all of this work that we're putting into the economy and then I see rates going up. I am not happy about it. But at the same time I'm letting them do what they feel is best.

US PRESIDENT DONALD TRUMP, on the Federal Reserve's rate hikes.

Mr Lawrence Summers, the former treasury secretary, and Mr Adam Posen, president of the Peterson Institute for International Economics, both echoed Mr Feroli's comments in social media posts in the aftermath of the interview. "Likely result of presidential intervention is higher rates as Fed needs to assert its independence," Mr Summers tweeted.

The Fed has raised rates five times since Mr Trump took office in January last year, and has pencilled in two more hikes for this year. It is also scaling back the support it is providing the economy by gradually reducing its holdings of Treasury and mortgage-backed bonds.

There is little evidence the Fed's tightening is constricting the second-longest US economic expansion on record: The unemployment rate under Mr Trump has fallen to 4 per cent, from 4.8 per cent the month he was sworn in, and some economists estimate gross domestic product in the last quarter expanded by more than 4 per cent - about double the pace in the first three months of the year.

Mr Trump's rebuke broke with more than two decades of White House tradition of avoiding comments on monetary policy out of respect for the independence of the US central bank.

The US dollar relinquished gains from earlier in the day and Treasury yields dropped following the President's remarks.

"The Fed's independence from short-term political pressures is critical to enabling it to take the longer-run perspective that is essential for achieving its legislated dual mandate for jobs and price stability," said Mr Donald Kohn, a former Fed vice-chairman who is now a senior fellow at the Brookings Institution in Washington.

Mr Powell last week told American Public Media's "Marketplace" programme that the Fed has "a long tradition here of conducting policy in a particular way, and that way is independent of all political concerns".

The US President is limited in how much direct pressure he can put on the Fed chief. Nominated by Mr Trump and confirmed by the Senate with broad bipartisan support, Mr Powell's four-year term as chairman ends in 2022. According to the Federal Reserve Act, a Fed chairman, or any Fed governor, can be removed from office before his or her term ends only "for cause," which is not defined.

Mr Powell, perhaps wary of provoking the ire of the President, has also been particularly careful in press conferences and congressional testimony when asked to comment on Mr Trump's tax and trade policies. "I'm really firmly committed to staying in our lane, and, you know, our lane is the economy," he told the Senate Banking Committee on Tuesday.

"He's really gone out of his way not to make himself a political target, a pinata," said Ms Diane Swonk, chief economist of Grant Thornton in Chicago.

It has long been speculated that the taboo of commenting on US monetary policy could change under Mr Trump, who slammed the Fed during his election campaign and has demonstrated repeatedly his willingness to flout the conventions and sensibilities of establishment Washington.

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A version of this article appeared in the print edition of The Straits Times on July 21, 2018, with the headline 'Trump's remarks on Fed policy may backfire'. Print Edition | Subscribe