President Trump’s persistent Federal Reserve-bashing, renewed this week ahead of Wednesday’s highly anticipated monetary policy meeting, raises the risk that he could reap the blame for a mistake by the central bank, or for undercutting public confidence in the institution of the Fed.
“If it’s perceived as if he’s influencing the Fed, then the responsibility will fall on his shoulders, and I think it’s also possible that the Fed could overreact,” said Marc Short, Trump’s former director of legislative affairs and a fellow at the Miller Center at the University of Virginia.
By appearances, Trump has indeed been trying hard to influence the Fed and direct monetary policy. He tweeted criticisms of the Fed Monday and Tuesday, calling on Fed officials as they gathered in Washington, D.C., for a two-day meeting not to go through with an expected increase in their short-term interest rate target, which would be the fourth such rate hike this year.
I hope the people over at the Fed will read today’s Wall Street Journal Editorial before they make yet another mistake. Also, don’t let the market become any more illiquid than it already is. Stop with the 50 B’s. Feel the market, don’t just go by meaningless numbers. Good luck!
— Donald J. Trump (@realDonaldTrump) December 18, 2018
Trump has argued that the Fed is unduly tightening monetary policy and undercutting his efforts to grow the economy and gain the upper hand in trade negotiations.
So far, Fed Chairman Jerome Powell and other Fed officials have studiously ignored Trump and proceeded with rate hikes. Yet soon, recent remarks by Powell and other officials suggest, they will consider slowing or stopping further rate hikes, because short-term interest rates are near “normal” levels — that is, they are near where they would be in a fully recovered economy.
If Fed officials halted rate hikes, though, the public might be confused whether they were doing so because of their own, independent judgment, or because of Trump’s criticisms. That confusion would be a problem for the Fed.
“If [investors] think the Fed is being responsive to the president, that would be very bad. You’d see a severe market reaction,” said Jim Pethokoukis, an economic policy expert with the American Enterprise Institute. “That is a fundamental strong point of the American is a strong independent bank. If they’re not independent? Then you’re on the path to becoming Venezuela.”
The threat is that, if investors believed that Trump had the ability to sway monetary policy, markets could begin to swing with every Trump tweet or comment on the economy.
Yet Trump administration officials have downplayed Trump’s hopes for actually influencing Powell and company. They have maintained that Trump is merely expressing an opinion on the Fed’s decision-making, not trying to change its course of action.
“He’s been very clear about what his position is while at the same time he understands that the Fed is an independent agency, that doesn’t take away the president’s right to state his opinion on a particular matter,” White House press secretary Sarah Sanders said in a press briefing Tuesday.
Trump is far from the first president to try to lean on the Fed to keep interest rates low. But where past presidents have tried to pressure Fed officials behind closed doors or even — in the case of President Lyndon Johnson — through physical intimidation, Trump has limited his efforts to statements and tweets.
Alice Rivlin, the Fed’s vice chair during most of President Bill Clinton’s second term, downplayed the effects Trump’s comments could have on the Fed.
“I don’t think anything remarkable has actually happened” with regards to Trump and the Fed, said Rivlin, adding: “This president has a less careful way of saying the things he thinks about.”
Rivlin cited Trump’s appointments of Powell and Vice Chair Richard Clarida, who have carefully avoided even the appearance of politicized decisionmaking and have the confidence of Congress as proof that the president has not done anything to erode confidence in the Fed yet.
