October 16, 2018
Finance

Trump goes to war with the Fed

WASHINGTON — President Donald Trump praised Jerome Powell as “strong, committed and smart” last year when he nominated the former banker to lead the Federal Reserve. Now, the president apparently thinks Powell is a dangerous lunatic.

In an extraordinary series of attacks this week, Trump called the Fed “crazy,” “loco” and said its “gone wild” with interest rate hikes. And he blamed the central bank, in part, for the latest sharp decline in the stock market.

“I think the Fed is out of control,” he told reporters Thursday.

“I think I know about it better than they do,” Trump said. He expressed disappointment with Powell but said he would not fire him, something he lacks the authority to do anyway barring extreme circumstances.

Trumps battle with the Fed played out as markets tumbled Wednesday, then whipsawed Thursday before turning sharply lower late in the day. The Dow Jones Industrial Average closed down Thursday another 545 points, bringing its two-day decline to over 1,300 points, or more than 5 percent. The S&P 500 and Nasdaq also declined again on Thursday.

In the process of attacking the Fed in such an unprecedented manner, Trump has alarmed senior advisers and forced them into public walk-backs. And hes unnerved market watchers and former government officials who fear the sharp broadsides could undermine the Feds longstanding role as a politically neutral arbiter of interest-rate policy — charged with making tough decisions with a focus on the long-term interest of the U.S. economy.

“The president is wrong, obviously, in his judgment about the Fed,” said Larry Summers, the former treasury secretary and economic adviser to Presidents Bill Clinton and Barack Obama. “There is room for debate about the precise posture of monetary policy. But the suggestion that there is something crazy about the Feds decisions is absurd.”

Summers said the more serious potential impact of Trumps comments are that they could give Powell and his Fed colleagues pause if they decide in the future they need to slow down or reverse rate hikes — a posture that likely would support Trumps current view.

“It is important for the Fed to preserve its credibility as apolitical and independent,” Summers said. “This kind of hectoring would make it more difficult to adjust policy in a dovish direction if the Fed thought that was appropriate. Not appearing to kowtow to politics is properly part of the Feds calculus.”

Powell, who is in Bali, Indonesia, for meetings of the Group of 20 finance officials, has no plans to respond to Trumps remarks, a person familiar with the matter said. People inside the central bank expected that the president would eventually attack Powell over the current modest pace of rate hikes that began under Fed Chair Janet Yellen.

For the moment, they are treating it as “noise,” according to one central bank official. Powell has no public remarks planned until November 14. In the past, he has declined to directly address Trump comments but instead obliquely referred to plans to stay on the current course with any deviations dictated by economic conditions, not political pressure.

Trumps comments forced both National Economic Council Director Larry Kudlow and Treasury Secretary Steven Mnuchin, who lobbied for Trump to pick Powell, to make public statements supporting the Fed chief and downplaying the presidents attacks.

Trump launched his broadsides against the Fed despite private conversations in which both Kudlow and Mnuchin urged him to describe the declines as a natural market correction and to highlight the continued strength of the economy. White House aides are now hoping Trump eventually gets tired of bashing the Fed and moves on.

“I dont think hes calling out the Fed, quote-unquote. I really mean this. I think hes giving you his opinion,” Kudlow told reporters at the White House. “He is a, obviously, successful businessman. Hes a very well-informed investor. He has his views. But hes not saying to them, Change your plan, do this differently. None of that stuff. He knows the Fed is independent and he respects that.”

Mnuchin, also in Indonesia for the G20 gathering, downplayed Trumps Fed criticism. “I dont think there was any new news that came out of the Fed today that wasnt there beforehand,” Mnuchin told CNN. “Markets go up. Markets go down. I see this as a normal correction.”

Trump on Wednesday night also suggested the decline is a normal correction before launching into his Fed criticism.

Market observers suggested because Trump has for so long pointed to the stock market as a report card on his administration, he felt forced to place blame on someone for a bad day in the market. Previous administrations mostly steered clear of daily market commentary out of fear of getting blamed when markets declined.

“The presidents comments confirm our view, which has been that Trump will blame the Federal Reserve for any negative economic news while taking credit himself for positive news,” Jaret Seiberg, analyst at the Cowen Washington Research Group, said in a note to clients on Thursday, noting that other presidents have criticized the Fed. “The difference is that we believe this President is willing to go much further than his predecessors in that criticism. This includes frequently floating the idea that he could fire” Powell.

Presidential criticism of the Fed is not unprecedented. President George H.W. Bush lamented the slow nature of rate cuts ahead of his 1992 loss to Clinton. And President Richard Nixon privately hectored then-Fed Chair Arthur Burns into keeping rates low. Burns complied, setting the stage for runaway inflation that forced a rapid series of rate increases by Fed Chair Paul Volcker in the 1980s.

But no president has publicly attacked the Fed using the kind of language Trump deployed this week, suggesting that Powell and his colleagues have lost their minds. The language shocked some government officials who said Trump knew before nominating Powell that the gradual path of rate hikes set by Yellen would continue under the new leadership. “There is nothing about what Jays done that should surprise him at all,” one senior government official said Thursday, using the Fed chairs common nickname.

Trump rejected candidates for Fed chair who might have been more hawkish on rates than Powell, including former Fed governors Kevin Warsh and John Taylor. He considered keeping Yellen but eventually bowed to Republicans on Capitol Hill who wanted a Fed chair with Republican credentials. Many of those Republican officials had complained loudly for years about the Fed keeping rates too low under Obama.

Market observers on Thursday also noted that the reason rates are going up is in large measure because the economy is performing so strongly under Trumps presidency. Economic growth is on pace to hit 3 percent for the year and unemployment is down to 3.7 percent, near historic lows. The Fed is hiking rates slowly to try to prevent overheating and inflation, and to preserve its options in the future should it have to cut rates to fight the next downturn.

The central banks target rate for overnight loans between banks, which ultimately sets rates for everything from credit cards to home mortgages, remains low by historic standards at 2 percent to 2.25 percent. The central bank is expected to raise rates once more in December.

Some market analysts suggested that Trumps rhetoric is aimed at trying to get the Fed to hold off on another hike this year, something few expect he will succeed in doing, barring a significant slowing in the economy.

“The economy — especially the labor market — is over-heating, and the president wants it to stay hot through his reelection fight in 2020,” Greg Valliere, chief global strategist at Horizon Investments, wrote in a note to clients. “But many of Trumps economic prescriptions invite inflation — so obviously the Fed has to take away the monetary punch bowl.”

Trump would likely run into trouble if he tried to fire Powell simply over a disagreement on rate policy. While the president does have the power to fire the Fed chair, he can only do so “for cause,” which is generally interpreted to mean some kind of improper conduct or reason to doubt the chairmans fitness for duty.

In a case that underpins the legal status of independent agencies, Humphreys Executor v. United States, the Supreme Court ruled that Congress can limit the ability of presidents to fire members of such agencies because they are “quasi-legislative” bodies.

Summers suggested the best path for Trump would be to stop commenting on the stock market at all. “We were consistent in both administrations I served in and never crowed when the markets were up,” he said. “And we didnt regard it as a referendum on our policies when markets went down.”

Victoria Guida contributed reporting.

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