Trump’s criticism of Fed a reminder central bank independence isn't guaranteed

WASHINGTON — President Trump’s criticism of the Federal Reserve’s interest rate policy was as unprecedented as it was unsurprising.

While virtually every president of the modern era has carefully avoided critiquing the central bank for fear of compromising its independence, it was hardly shocking that Trump, who has broken the mold in so many other ways, scrapped that tradition.

But his comments come at a dangerous time for the Fed, when it is already fending off bids by various factions in Congress to limit its power and independence—efforts motivated by a fundamental lack of faith in the central bank and the wisdom of its leaders. That might have expected to taper off now that the Fed is run by a Trump nominee, but that hasn’t been this case.

Just this week, House Financial Services Committee Chairman Jeb Hensarling told Fed Chairman Jerome Powell during a hearing that the central bank’s process of normalizing its balance sheet is going too slowly. It may ultimately not shrink to pre-recession levels, a prospect the Texas Republican said “may well threaten the integrity and independence of the Fed’s conduct of monetary policy, by enabling competing activities that lie outside its mandate for stable and full employment.”

Andrew Harrer/Bloomberg

Hensarling also suggested that the Fed’s 2% inflation target — which has been established for years, and which actual inflation rates have consistently and somewhat inexplicably failed to reach — was too high, and that Congress was the rightful decider of monetary policy.

“I understand that other central banks do this. I understand this may be good policy,” Hensarling said. “But if so, Congress should decide this.”

In an interview with CNBC on Thursday, Trump didn’t go that far, calling Powell a “good man” and saying he will let him and other Fed governors “do what they think is best.” But he also made it clear he was “not happy about” the central bank’s gradual increase in interest rates over the last few years.

Trump he also argued that the central bank was putting the brakes on economic growth by raising rates and making the U.S. dollar stronger at the same time as other currencies — notably the euro and the Chinese yuan — are depreciating.

“I’m not thrilled, because, you know, we go up, and every time you go up, they want to raise rates again. And I don’t, you know … I am not happy about it,” Trump said. “You know, last year — and for years — we’ve been losing $150 billion with the EU nations, with the European Union, and they’re making money easy and they’re currency is falling, and China, their currency is dropping like a rock. And our currency is going up, and I have to tell you, it puts us at a disadvantage.”

Trump’s monetary policy preferences have fluctuated since he launched his campaign in 2015.

During a presidential debate in 2016, he criticized then-Fed Chair Janet Yellen for keeping interest rates low for what he said were political reasons.

After his election, however, he reportedly told Yellen that he considered her a “low interest-rate person” like himself. He also recently praised Turkish President Tayyip Erdogan — who has recently exerted greater control of the Turkish Central bank — as someone who “does things the right way.”

Trump clearly knows that criticizing the Fed is something he’s not supposed to do. He said as much in the CNBC interview, suggesting that “somebody would say, ‘Oh, maybe you shouldn’t say that as the president.’ I couldn’t care less what they say, because my views haven’t changed.”

But what the president says — particularly as it pertains to the Fed — has consequences. The dollar and Treasury yields both fell in reaction to the comments, and the Dow Jones industrial average, S&P 500 and Nasdaq indexes were all down by about 0.5% on the day.

Criticism of the Fed is hardly new, and Powell has been on the board of governors long enough to know to expect it when he goes before Congress four times a year and in front of the press every six weeks.

He may even expect it from a president who appears to relish breaking unspoken rules, particularly when it comes to what he should say and to whom.

But the Fed’s independence from political interference isn’t just its greatest strength — it is virtually its only one. The United States is the biggest economy in the world because it has the largest and most stable markets in the world, and that is owed in large part to the expectation by market participants that a disinterested group of technocrats and policy experts at the Fed are manning the wheel, free from the whims of whichever political party happens to be in power.

Trump’s comments also put Powell in something of a bind. As noted by Ian Katz, an analyst at Capital Alpha Partners, “the problem is that if the Fed decides — on its own accord — to raise interest rates more slowly, a lot of people will say or think it’s because of Trump’s pressure.

“What’s important isn’t only that the Fed is independent, but that investors and the public believe that it’s independent,” Katz said.

That independence was given, however, and Trump’s comments are an important reminder it can also be taken away.

Bankshot is American Banker’s column for real-time analysis of today's news.