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Trump attacks on Fed raise specter of political meddling
WASHINGTON, July 21, 2018 (BSS/AFP) – President Donald Trump on Friday
doubled down on his attack on the Federal Reserve for raising interest rates
— a shock criticism of the central bank that US presidents traditionally
avoid and one economists say is dangerous.
He also lambasted China and the European Union for keeping interest rates
low and manipulating their currencies to gain a trade advantage.
Central banks in all advanced economies and many emerging market countries
are kept insulated from political influence and allowed to determine monetary
policy independently.
Governments that have violated that independence for short-term economic
gain have done so at their peril, including one US president who did so
infamously: Richard Nixon.
Trump said the Fed was undermining economic progress by raising the
benchmark lending rate.
In a pair of tweets, Trump said “China, the European Union and others have
been manipulating their currencies and interest rates lower, while the US is
raising rates while the dollars gets stronger and stronger with each passing
day.”
That is “taking away our big competitive edge,” he said. “As usual, not a
level playing field.”
After criticizing the Fed in an interview with CNBC on Thursday, Trump was
even more harsh on Twitter, saying “Tightening now hurts all that we have
done.”
And he noted the impact of higher rates on debt payments: “Debt coming due
& we are raising rates – Really?”
“The United States should not be penalized because we are doing so well,”
he tweeted.
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– ‘Banana republic’ –
The comments drew alarmed reaction from notable economists and former
government officials.
“Attacking central bank is one more step in what seems like a presidential
strategy of turning the United States into a banana republic,” Former
Treasury Secretary Larry Summers warned on Twitter.
In an interview with CNBC, Summers said pressuring a central bank could
“produce results and looks good for a while but ultimately it leads you into
real trouble.”
Rising borrowing costs can slow economic growth and generally boost the
value of the currency since it attracts more funds into the country in search
of higher yields from investments.
Since the United States has recovered faster than other major economies,
the Fed is raising rates faster than other central banks as well, making the
US a more attractive investment destination. That has caused trillions of
dollars to flow out of emerging market economies.
Trump is benefitting from an economy nearing a decade of continued growth,
with continued solid job gains and the lowest unemployment rate since 2000,
prior to the global financial crisis.
The Fed has raised the benchmark lending rates twice this year, after
three increases in 2017, and two more rate hikes are expected this year as
the central bank removes stimulus from the economy to keep a lid on
inflation.
The chance inflation might accelerate has increased after the massive tax
cut last year that Trump championed, which has raised the US debt and budget
deficit.
Trump said he was unconcerned that his remarks might spark criticism as he
was merely stating long-held personal views.
“I couldn’t care less,” he told CNBC.
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But simply “jawboning” the Fed with such comments, even without overt
pressure, in itself undermines confidence of financial markets that
policymakers will be able to stay the course and keep prices in check.
The dollar is up from early this year against a basket of currencies but
is below the peak hit in December 2016 just after Trump was elected. And his
comments sent the dollar down sharply.
The Fed chairman, Trump-appointee Jerome Powell, has repeatedly stressed
the commitment to an independent central bank.
Powell said in an interview last week that “nothing has been said to me
publicly or privately that gives me any concern about our independence.”
But he cautioned in a speech in May that “trust in government and public
institutions is at historic lows” so “central banks cannot take our measure
of independence for granted.”
In the early 1970s, President Richard Nixon pressured Fed chief Arthur
Burns to keep interest rates low ahead of the 1972 presidential election,
when Nixon won a second term. He said he preferred inflation to unemployment.
But as Oxford Economics recalled, “Loose monetary policy implemented by
the Federal Reserve along with the oil price shocks in the 1970s would
eventually push inflation to nine percent in late 1973 and 12 percent in late
1974.”
Summers and others warned that even perceived political pressure could
force the Fed to raise rates more aggressively just to prove its
independence.
“It’s a fool’s game,” Summers said.
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