Trump criticizes Fed, breaking 25-year precedent and jeopardizing economy, expert warns

Paul Davidson | USA TODAY

Show Caption Hide Caption Trump nominates Jerome Powell as Fed chairman President Donald Trump on Thursday announced his choice of Federal Reserve board member Jerome Powell to be the next chairman of the nation's central bank, succeeding Janet Yellen, the first woman to hold the position. (Nov. 2)

By breaking with a 25-year tradition and criticizing Federal Reserve officials for raising interest rates, President Donald Trump has put Fed policymakers in a no-win position that could jeopardize the economic expansion, at least one Fed scholar says.

Other economists are downplaying Trump’s remarks, noting that Fed Chairman Jerome Powell is unlikely to be influenced by them and the central bank is an independent agency that has other safeguards designed to insulate it from political pressure.

In a CNBC interview scheduled to air Friday morning, Trump said, “I’m not thrilled” with the Fed’s rate hikes. “Because we go up, and every time you go up they want to raise rates again. I don’t really – I’m not happy about it. At the same time I’m letting them do what they feel is best.”

The Fed’s policymaking committee has raised rates twice in 2018 and forecast two more bumps this year and three in 2019. The Fed boosts rates to tamp down economic activity and head off a spike in inflation. But the strategy can make stocks less attractive, and lifting rates too rapidly can trigger a recession.

Powell and other Fed policymakers almost certainly will not allow themselves to be consciously influenced by Trump’s comments, says Peter Conti-Brown, a professor of legal studies and business ethics at the Wharton School in Philadelphia.

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The Fed wouldn’t comment Thursday. But in a radio interview last week, Powell said, “We have a long tradition here of conducting policy in a particular way, and that way is independent of all political concerns.”

If anything, Conti-Brown says, they could raise rates more quickly “to assert their independence,” possibly slowing economic growth.

“That means human lives are going to be profoundly affected,” says Conti Brown, author of "The Power and Independence of the Federal Reserve."

”People will lose jobs,” he adds.

The bigger problem, he says, is that perceptions of Fed policy and the economy are nearly as significant as the policy decisions themselves. “Now, they’re damned if they do and damned if they don’t.”

If the Fed slows the pace of rate hikes, they’ll be accused of “buckling under pressure,” Conti-Brown says. That could spur the belief that policymakers will continue on that path to appease Trump, fueling inflation fears. And expectations of inflation can cause inflation to accelerate as businesses raise wages and prices to keep pace.

If Fed officials proceed apace, or speed up the rate increases, investors and the public could conclude they’re doing so to buck the president. That could stoke recession worries and lead businesses and consumers to pull back on spending, Conti-Brown says.

“This is a very bad day for the Federal Reserve,” he says.

But JPMorgan Chase economist Michael Feroli says Trump's remarks “are largely inconsequential for the monetary policy outlook.”

The Fed’s policymaking committee is made up of 12 voting members who can't be swayed in any single direction, he says. Seven are Fed board governors appointed by the president but they have 14-year terms “and can only be removed ‘for cause.’ ” Feroli says.

For years, presidents such as Richard Nixon, Jimmy Carter, Ronald Reagan and George H.W. Bush did publicly comment on Fed policy, typically favoring lower rates to boost the economy, Conti-Brown says.

Nixon’s phone transcripts include a December 1971 exchange with then Fed Chairman Arthur Burns in which Nixon praises him for lowering the discount rate, according to an article in the Journal of Economic Perspectives. Of other Fed policymakers, Nixon says, “You can lead ‘em … Just kick ‘em in the rump a little.”

The Fed’s benchmark rate fell more than four percentage points from January 1970, just before Burns took office, to July 1972, juicing the economy but eventually setting off high inflation. The article notes it’s unclear if Burns acted to comply with Nixon or to bolster the economy.

The low rates, combined with massive government spending on the Vietnam War, triggered the runaway inflation of the early 1970s, says Tim Duy, economics professor at the University of Oregon and author of the FedWatch blog. There are risks of a similar scenario today, he says, with tax cuts and higher government spending goosing growth and Trump now urging low rates.

George H.W. Bush spoke of the need to lower rates more quickly before the early 1990s recession, Conti-Brown says. And in a 1998 interview with David Frost, Bush blamed then-Fed chairman Alan Greenspan for his loss in the 1992 election. “I reappointed him, and he disappointed,” Bush said.

In the early 1990s, President Bill Clinton began a policy of not commenting on Fed interest rate moves to preserve the Fed’s independence, a practice that was upheld by every president since – until Trump on Thursday.