Mnuchin Says Trump Respects the Independence of the Fed

Mnuchin Says Trump Respects the Independence of the Fed

The real reason Trump is bashing the Federal Reserve

President Trump responded to falling stock prices on Thursday by continuing to throw rocks at the Federal Reserve, which he has described as crazy, loco, going wild and out of control for slowly raising interest rates against the backdrop of a booming economy.

No other modern president has publicly attacked the Fed with such venom or frequency. Indeed, some scholars said the only close historical parallel was with President Andrew Jackson, who campaigned successfully in the 1830s to close the Feds predecessor, the Second Bank of the United States.

Hardly anybody who pays attention to monetary policy agrees with Trump. The Fed has been gradually raising interest rates, which remain unusually low, to head off inflation and return to levels more in line with historical norms. Presidents usually leave the Fed alone, since political interference with monetary policy can be disastrous, as it was when Richard Nixon manipulated Fed policy in the early 1970s. Nixon wanted the Fed to stimulate the economy prior to the 1972 election, which it did, at his behest—but the badly timed stimulus ended up worsening inflation and contributing to other problems that took a decade to clear up.

Mr. Trumps pointed remarks reflect the high political stakes less than a month before midterm elections that have been cast by his political opponents as a referendum on his presidency. Mr. Trump has been riding the economy hard, bragging about job creation, tax cuts and reduced federal regulation, and claiming credit for the rise of the stock market. Now that the market has lost 5 percent of its value in the last week, Mr. Trump is insisting someone else is to blame.

In fact, despite the stock markets plunge, the American economy continues to grow, which is what is prompting the Fed to raise interest rates and drawing the presidents ire. The Feds chairman, Jerome H. Powell, has said that the economy is in a particularly bright moment and that he sees no clouds on the horizon.

Trump, for instance, has been relentlessly bashing the Robert Mueller investigation into Russian interference in the 2016 election. Mueller, so far, has had precisely nothing to say about Trump himself. So theres been no need at all for Trump to defend himself against Mueller, up till now. But by repeatedly calling the probe a witch hunt, Trump is preparing for the eventuality that Mueller will some day impugn him. Trump is trying to preemptively invalidate the probe, in the mind of the public, by the time it actually touches him.

The stock market sell-off instead appears to reflect the movement of money into bonds, a normal consequence of higher interest rates since those securities pay more as rates rise; concern about the health of the global economy; and hesitations about the value of tech stocks.

But after hitching his political fortunes to the rise of the stock market, Mr. Trump is now looking to decouple himself from its fall. Republicans are instead emphasizing continued economic growth and the lowest unemployment rate since 1969.

Trump may also be nervous that other policies of his—such as tax cuts that may have come at the wrong time and his escalating trade war with China—could cause or contribute to a downturn. Some economists think the tax cuts will cause overheating, which could push up inflation. Trumps tariffs on imports could also contribute to inflation. And higher-than-expected inflation is one thing that ends business cycle expansions and torpedoes bull markets.

So far, the presidents comments have made little impression on market expectations about Fed policy. Unlike Jacksons concerted campaign, Mr. Trumps attacks appear curiously unmoored from the policies of his own administration or the longstanding goals of the Republican Party. Mr. Trumps own aides have insisted that the presidents remarks are personal musings, not an attempt to dictate policy.

By fingering the Fed as the culprit, Trump deflects attention from his own policies, which might be the real cause of the problem. Trump also knows the Federal Reserve is one of those elitist, globalist institutions some of his supporters are deeply suspicious of, if only because they dont understand it. To him, the Fed is a ready-made bogeyman he can blame for whatever economic pain he wants to excuse.

The Fed has also brushed off the attacks; it still expected to raise rates in December for the fourth time this year.

Mr. Powell, selected for the job by Mr. Trump, said at a September news conference that Mr. Trumps views would not influence the Feds decisions. We dont consider political factors or things like that, Mr. Powell said. Thats who we are, thats what we do, and thats just the way its always going to be for us.

Back in July, when stocks were on a run higher, Trump said he was “not thrilled” with the Feds rate hikes and was worried they would derail the economic momentum built up during his time in office. This week, with stocks on a losing streak and the Dow struggling to stay positive for the year, the president called the Fed “loco” and Thursday blamed it for the stock market tanking.

Mr. Powell emphasized that the decision to raise rates to a range between 2 and 2.25 percent was not intended to get in the way of continued growth. My colleagues and I are doing all we can to keep the economy strong, healthy and moving forward, he said.

Tariffs will negatively impact credit for U.S. retail and wholesale distributors of furniture, home goods, electronics, hardware and appliances that take goods from China, the ratings agency said. In addition, the impact of tariffs in intermediate goods will hit the construction, transportation, telecommunications and machinery manufacturing industries.

Peter Conti-Brown, a professor of legal studies at the University of Pennsylvania and the author of a political history of the Fed, pointed to the example of the F.B.I., another institution Mr. Trump has repeatedly attacked by raising questions about the integrity of its decision making. Mr. Conti-Brown said technocratic institutions are insulated from political pressure by public confidence. If confidence erodes, it becomes harder for technocrats to resist the politicians.

While the tariffs impacts have yet to be felt as they have just been implemented, theres fear spreading that when company executives deliver their outlooks soon, the news wont be good. Thats compounding fear that already has rippled through the financial world that after years of being dormant, inflation is finally on the prowl.

The F.B.I. has seen a loss of leadership, an erosion of morale and an increase in congressional scrutiny.

How long before the Fed is looking at its political context and saying, We cant stick our heads out as far as we need to, Mr. Conti-Brown asked rhetorically. How long will people stay if the job itself becomes terrible, and there are protesters everywhere you go?

“The earnings are going to come in pretty much in line,” said Michael Cohn, chief investment strategist at Atlantis Asset Management. “The forward guidance is going to be much worse than its been over the last three or four quarters. Its going to be horrific. Thats going to flatline the market for the most part.”

Mr. Trump criticized the Fed when it raised interest rates in July, and again when it raised interest rates in September. But his attacks have sharply intensified in recent days, in tandem with the drop in the stock market.

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I think the Fed has gone crazy, he told reporters on Wednesday afternoon. Later in the day, speaking with Fox News, he continued to increase the heat. The Fed is going wild, he said. I dont know what their problem is. They are raising interest rates and its ridiculous.

Its not right, he said Thursday. Its not necessary, and I think I know more about it than they do.

Mr. Trump added that he was disappointed with Mr. Powell but did not plan to fire him — an authority the president may not even have. While the president in theory has the power to remove a Fed chairman for cause, courts have held that the permissible causes do not include policy disagreements.

For the moment, Mr. Trumps criticism of the Fed does not seem to be catching on with Republican candidates. Many Republicans have argued for years that the Fed was waiting too long to raise interest rates, and then that it was moving too slowly. The party is trying to hold on to majorities in the Senate and the House by running on a strong economy and using the heated liberal opposition to Justice Brett M. Kavanaughs Supreme Court confirmation as an example of the threat Democrats pose if they control Congress. That dynamic could change, however, if the stock market continues to fall.

Modern presidents have always kept an uneasy eye on the Fed, because its decisions about monetary policy have a significant influence on the pace of economic growth.

Until the early 1950s, the Fed essentially operated as an arm of the Treasury Department. Even after the Fed gained operational independence, presidents often opined publicly about what the Fed should do and, if the Fed ignored their advice, they sometimes sought to bend its officials to their will.

President Lyndon B. Johnson protested a decision to raise interest rates in the late 1960s by summoning the Fed chairman at the time, William McChesney Martin, to his East Texas ranch and pinning the smaller man against a wall. President Richard M. Nixon instructed aides to blackmail Mr. Martins successor, Arthur Burns. President George Bush declared in a State of the Union address that the Fed should keep rates low.

But the volume of public commentary greatly diminished in recent decades as politicians concluded that pressuring the Fed was counterproductive. The administrations of Presidents Bill Clinton, George W. Bush and Barack Obama all made a policy of silence on monetary policy.

Krishna Guha, the head of the central bank strategy team at Evercore ISI, said he did not expect Mr. Trumps remarks to influence the Fed, and he saw no evidence that markets were paying attention. But he added that if Mr. Trump did succeed, he would most likely regret doing so.

If Mr. Trumps attacks convince markets that the Fed may move more slowly, or show greater tolerance of inflation, bond yields would rise, which would put further downward pressure on equity prices.

Still, Mr. Guha — formerly a senior official at the Federal Reserve Bank of New York — said that the presidents criticisms were not good for the central bank or the future conduct of economic policy.

You never want to be in a position where some part of society doesnt just question whether you made the right call or not, but whether you made that call in the public interest, he said.

Mr. Trumps aides have sought to play down his broadsides. Larry Kudlow, the presidents top economic adviser, said Mr. Trump was just offering his two cents. I dont think hes calling out the Fed, quote unquote, Mr. Kudlow told reporters outside the White House on Thursday morning. I really mean this. I think hes giving you his opinion. 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.

Mr. Trumps criticisms appear strangely at odds with the way he has handled the most powerful means at his disposal to influence monetary policy. Since taking office less than two years ago, he has had the unusual opportunity to fill six of the seven seats on the Feds board of governors.

He filled the top three positions on the Feds board, including the chairmans job, with members of the Republican policymaking establishment, which has long been committed to keeping inflation firmly under control. Three other nominees, still awaiting confirmation, are a more diverse group, but there is no indication any share Mr. Trumps stated opposition to raising interest rates.

In most areas of administrative policy that have been highly politicized, his appointments have privileged politics over competence, Mr. Conti-Brown said. The Fed has been an exception.


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