Trump attacks the weak link Powell can’t ignore

President blasting Fed for raising interest rates when inflation is tame

WASHINGTON» Donald Trump has attacked the soft underbelly of the Federal Reserve’s campaign to raise interest rates, exposing what Jerome Powell himself probably recognizes is a potential vulnerability.

Amid his recent avalanche of criticism, the president has repeatedly lambasted the Fed chairman and his colleagues for hiking rates when inflation isn’t a problem.

“My biggest threat is the Fed because the Fed is raising rates too fast,” Trump told Fox Business television Oct. 16. “You look at the latest inflation numbers, they’re very low.”

Powell has so far brushed aside Trump’s criticism, portraying the central bank’s actions as a move to normalize monetary policy in an “extraordinary” economy and saying the Fed was sticking with its strategy of gradual rate increases. And he’s argued that the central bank needs to keep its eye on possible financial froth — the trigger for the last two recessions — as well as inflation for signs of overheating.

That defense, though, may no longer be adequate if the Fed follows through with its projections to nudge rates into restrictive territory as growth slows and inflation stays tame. By the end of 2020, a substantial majority of policymakers expect to raise rates above their estimate of the longterm neutral level that neither restrains nor spurs growth, their forecasts show.

“Powell’s task has been made much more complicated by what Trump has said,” said economist Joseph Carson, who argues that the Fed needs to raise rates to rein in buoyant asset markets and reduce the risk of destabilizing financial imbalances. That consideration was cited by a number of officials at their meeting last month, according to minutes of the gathering released Wednesday.

The thrust, if not the method, of Trump’s criticism has some support, part of it from unexpected quarters.

“You can believe that the Fed is raising rates too quickly, as I do, and also believe

that weighing in the way Trump has is very, very bad,” liberal economist and Nobel Prize winner Paul Krugman said via Twitter on Oct. 12.

Trump is right: Inflation is not a problem, at least for now. After stripping out volatile food and energy costs, the personal consumption expenditures price index rose 2 percent in the 12 months to August, in line with the Fed’s inflation target.

In some sense, the Fed is a victim of its own success. Consumers and companies are so convinced the central bank won’t let inflation get out of control, they act in ways that turn that belief into reality. And Powell wants to keep it that way. The result, though, is that inflation may no longer be the best indicator of whether the economy is overheating, Powell said during an Aug. 24 speech.

“In the runup to the past two recessions, destabilizing excesses appeared mainly in financial markets rather than in inflation,” Powell said. “Thus, risk management suggests looking beyond inflation for signs of excesses.”

It might not be easy, however, to justify tightening credit to counter such imbalances when inflation is tame, especially in the face of presidential criticism.

The Fed doesn’t have a mandate to prevent an unsustainable surge in prices of shares (such as occurred before the 2001 recession) or of homes (which happened before the devastating downturn of 200709).

And even if the Fed could recognize bubbles before they form, steps to arrest them likely would be politically unpopular.