Trump attacks weak link in Fed’s rate plan
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 on Tuesday. “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 policy makers expect to raise rates above their estimate of the long-term 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. He argues 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 on 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 that the central bank won’t let inflation get out of control that they act in ways that turn that belief into reality. And Powell wants to keep it that way.