Trump Takes a Rare Presidential Swipe at the Fed
Posted July 19, 2018 7:49 p.m. EDT
WASHINGTON — President Donald Trump criticized the Federal Reserve on Thursday for raising interest rates, a rare rebuke by a sitting president that upends long-standing White House protocol to avoid commenting on monetary policy.
Trump, in an interview with CNBC set to air on Friday morning, said he was “not thrilled” about the Fed’s decision to raise interest rates twice so far this year, to a current range of 1.75 to 2 percent. He implied that the moves, which are aimed at getting interest rates back to historically normal levels, could derail his administration’s efforts to bolster the economy and put the United States at a disadvantage.
“I don’t like all of this work that we’re putting into the economy and then I see rates going up,” Trump said, according to excerpts released by CNBC. “I am not happy about it.”
The highly unusual comments come as Trump and Republicans try to make a booming economy a big issue in the midterm elections this year. At a White House event Thursday, Trump — flanked by executives from some of the biggest companies in the country — announced a worker retraining program that he said would further goose employment. On Capitol Hill, Republican lawmakers are trying to pass a second round of tax cuts that would make permanent many of the individual cuts in last year’s $1.5 trillion package.
But as the economy finally gains steam after years of sluggish growth in the wake of the Great Recession, the Fed is facing a delicate political and economic balance. Unemployment is at an 18-year low. Inflation is running above the Fed’s 2 percent target. Gross domestic product growth could hit 3 percent this year, which would be the best rate in more than a decade, and growth for the second quarter is estimated to be as high as 5 percent when the numbers are released Friday morning.
If the Fed raises rates too quickly, it risks slowing growth at a time when wages have stagnated for most U.S. workers, after accounting for inflation. But some Fed officials fear that if it raises rates too slowly, the economy could “overheat” and ignite a rapid spiral of price increases that could eventually prompt a recession. Historically, presidents have preferred lower rates, because faster economic growth typically helps incumbents win re-election.
Indeed, during his presidential campaign, Trump accused the Fed of getting political, saying that the bank’s chairwoman at the time, Janet Yellen, should be “ashamed” for keeping interest rates low — a move he said was meant to help President Barack Obama.
The Fed is on track to raise rates twice more this year, for a total of four increases in 2018, after cutting them to near zero in the wake of the financial crisis. The chairman of the Fed, Jerome Powell, has continued to express confidence that the U.S. economy is strong enough to handle higher borrowing rates. Typically, a period of economic expansion is the exact moment when a central bank seeks to raise rates, to keep price growth in check — and in part to maintain firepower to lower borrowing costs during the next economic downturn.
Larry Kudlow, who leads the National Economic Council, said on Thursday that Trump’s comments were not unusual in historical context.
“Lots of people talk about the Fed. That doesn’t mean they’re jawboning them,” Kudlow said, adding that the president was not “in any way, shape or form trying to influence the Fed or undermine its independence.”
Former White House officials said Trump’s words could backfire by building pressure on Fed officials to demonstrate political independence.
“Likely result of Presidential intervention is higher rates as Fed needs to assert its independence,” Lawrence Summers, a top economic official in the Obama and Clinton administrations, said Thursday on Twitter. “That is part of the reason why wise Presidents respect Fed independence.” It is not the first time that Trump and members of his administration have broken economic policy protocols. The president tweeted about the monthly jobs report shortly before its release June 1, hinting that it would be strong. Steven Mnuchin, the Treasury secretary, moved currency markets in January when he said a weak dollar could help the United States in trade.
In his interview with CNBC, Trump said that rising rates were putting the U.S. at a disadvantage with its trading partners, including Japan and the European Union, which have kept their own interest rates near zero as the Fed has increased rates. The rate hikes have contributed to a strengthening of the dollar in recent months, which allows Americans to more easily buy imports. That can widen the trade deficit, a metric that Trump believes indicates weakness in the U.S. economy.
Trump also seemed to suggest he would not try to meddle in the Fed’s affairs, saying “I’m letting them do what they feel is best.” He also called Powell, whom he nominated as Fed chairman last year, “a very good man.”
Trump said that he understood he was breaking with protocol but that he did not care.
“Now I’m just saying the same thing that I would have said as a private citizen,” he said. “So somebody would say, ‘Oh, maybe you shouldn’t say that as president.’ I couldn’t care less what they say, because my views haven’t changed.”
Presidents have no direct authority over interest rate decisions, only the power to appoint some of the Fed members that set those rates.
While there have been some instances in the past of presidents weighing in on monetary policy, those have been rare. Independence from presidential criticism has long been a hallmark of the Fed’s existence and a contributor to its ability to maintain monetary policy that aims to keep inflation stable and the economy running at maximum employment.
A Fed spokesman declined to comment Thursday. The two most recent past leaders of the Fed, Yellen and Ben Bernanke, also declined to comment.
Powell has said repeatedly that the president has not attempted to interfere with the Fed’s policy decisions and would have no success if he tried. “Let me just say I’m not concerned about it,” Powell told the Marketplace radio program in an interview last week. “We have a long tradition here of conducting policy in a particular way, and that way is independent of all political concerns.”
Asked about possible White House displeasure over rate increases at his inaugural news conference in March, Powell responded: “No. That doesn’t keep me awake at night. We don’t consider the election cycle.”
Trump has nominated five members to the Fed board, including Richard Clarida, a Columbia University economist who is awaiting confirmation by the Senate on his appointment as vice chairman, and Michelle Bowman, the Kansas banking commissioner, who has been nominated for a seat reserved for community bankers. Both pledged to carry out their jobs free of political interference during their confirmation hearings, and Clarida said that the president had “absolutely not” indicated a preference for how he should vote on interest rate decisions.
But one of the candidates Trump considered for chairman, former Fed Governor Kevin Warsh, said on a Politico podcast this year that during an interview for the position, the president had made his opinions on interest rate policy clear.
“If you think it was a subject upon which he delicately danced around, then you’d be mistaken. It was certainly top of mind to the president,” Warsh said. Later, he added: “In some sense the broader notion of an independent agency, that’s probably not an obvious feature to the president.” Warsh said Thursday that he was too busy to discuss Trump’s CNBC comments.
The most recent presidents to openly pressure a Fed chairman to keep interest rates low, to lift growth, were Richard M. Nixon and George H.W. Bush.
“I respect his independence,” Nixon said of the chairman at the time, Arthur Burns, at his swearing-in at the White House in 1970. “However I hope that independently he will conclude that my views are the ones that should be followed.” Nixon continued, “That’s a vote of confidence for lower interest rates and more money.”
His aides would later seek to undermine Burns, including by spreading a story that he had sought a big pay increase at a time he was urging lower pay hikes. Burns later wrote in his diary of Nixon, “I knew that I would be accepted in the future only if I suppressed my will and yielded completely — even though it was wrong at law and morally — to his authority.”
In the administrations of Bush and Ronald Reagan, there were efforts to influence the Fed Chairmen Paul Volcker and Alan Greenspan, although those tended to be more subtle.
Nicholas Brady, Treasury secretary to Bush, privately urged Greenspan to lower interest rates in spring and summer 1991, as Greenspan’s reappointment as Fed chairman was being weighed.
However, upon being reappointed, Greenspan did not lower rates as much as the Bush administration preferred. Bush would later blame Greenspan for his election loss in 1992, which occurred in the aftermath of a recession.
“I reappointed him, and he disappointed me,” Bush said in a television interview in 1998.