Trump's Fed criticism prompts fears he's questioning bank's independence
Central bankers and politicians squabble often, but stakes are higher this time
U.S. President Donald Trump took his second shot in as many days at the man he hand-picked to run his central bank on Friday, saying the Federal Reserve's current plan to raise interest rates will hurt his administration and penalize the economy.
In a series of tweets on Friday, Trump complained about the Fed's current round of rate hikes, saying while policymakers in Europe and China are cutting their interest rates, America's central bank is doing the opposite, which is widening the trade imbalance he is trying to remedy.
China, the European Union and others have been manipulating their currencies and interest rates lower, while the U.S. is raising rates while the dollars gets stronger and stronger with each passing day - taking away our big competitive edge. As usual, not a level playing field...
—@realDonaldTrumpChina's central bank rate is currently 4.35 per cent and the country hasn't cut its benchmark rate since 2015. The European Central Bank, however, is keeping its benchmark rate near zero. But while the Federal Reserve's current benchmark rate is less than half of China's, the Fed is in the middle of steadily ratcheting its lending rate higher. After keeping rates at near zero for years, the Fed has hiked its benchmark interest rate seven times since 2015, and more are planned because the U.S. economy is heating up.
All things being equal, rate hikes have the effect of raising a value of a country's currency, because they mean investors can expect higher returns for investing in that country. So the Fed's rate hikes have lit a fire under the U.S. dollar, something which tends to widen the country's trade deficit as foreign countries with weaker currencies become much cheaper to import from.
That phenomenon is being magnified by Trump's trade rhetoric, since fear of a global trade war has investors flocking for the historical perceived safety of the U.S. dollar.
"Tightening now hurts all that we have done," Trump continued, calling the Fed's strategy into question, and raising larger concerns over whether he is trying to interfere in the independence of the bank.
....The United States should not be penalized because we are doing so well. Tightening now hurts all that we have done. The U.S. should be allowed to recapture what was lost due to illegal currency manipulation and BAD Trade Deals. Debt coming due & we are raising rates - Really?
—@realDonaldTrumpDuring the 2016 election campaign, Trump was critical of the Fed for keeping rates low, but that was because he thought it favoured his Democratic opponent.
Lindsay Walters, a White House spokesperson, said Thursday in a statement that the president "respects the independence of the Fed."
"The president's views on interest rates are well-known, and his comments today are a reiteration of those long held positions, and public comments," Walters said.
Squabbling nothing new
Policymakers around the world go out of their way to maintain the independence of their central banks, because the temptation to use monetary policy as a political tool by elected officials is too great. The inverse is also true, as central bankers go out of their way to stay out of political and fiscal decisions, and tend to make headlines when they say things perceived to be remotely critical of government policies.
The Fed is led by chairman Jerome Powell, who was hand-picked by Trump in February to succeed Janet Yellen for a four-year term.
Last week, Powell said in an interview with American radio program Marketplace that he didn't expect to face pressure from the White House.
"We have a long tradition here of conducting policy in a particular way, and that way is independent of all political concerns," Powell said. "We do our work in a strictly nonpolitical way, based on detailed analysis, which we put on the record transparently."
It's what allowed the Fed to take emergency measures in the past, without fear of political meddling, such as in 2008 when it undertook an aggressive policy known as quantitative easing, whereby it bought massive amounts of debt to create new money out of nothing, to stimulate the economy.
That policy drew rebukes from many Republican lawmakers at the time, but the Fed proceeded with its plan regardless.
Nor is it the only time the Fed and the White House have clashed. Both Bush administrations, and the Clinton administration that came between them, squabbled with chair Alan Greenspan, whose time atop the Fed saw the central bank make a long series of aggressive hikes and cuts between 1987 and 2006, when he was replaced by Ben Bernanke.
Prior to that, then-president Richard Nixon put pressure on more than one Fed chief to bend to his will on setting interest rates, which is why at least one watcher says the current squabble between the White House and the Fed is nothing new.
"The Fed should be independent but that independence does not mean that is an institution outside of the government of the United States," said Mark Grant, managing director at money managing firm B. Riley FBR Inc. "Independence does not mean 'above the law' or 'above the will of the people' and I am always just flabbergasted when some members of the Fed, or former members of the Fed, take the attitude that the Fed somehow does not report to the government."
Randall Kroszner, a former Fed governor, said the central bank has withstood political pressure before and will continue to do so under Powell's leadership.
"The Fed has often faced political pressures — from Congress, presidents, Treasury secretaries and innumerable outside groups," said Kroszner, an economics professor at the University of Chicago.
"My experience at the Fed is consistent with what Jay Powell recently said — being non-political is deep in the Fed's DNA — and I believe that Jay will keep it that way."
With files from The Associated Press