Trump interventions on Fed policy risk unsettling markets

Administration officials becoming more vocal on US monetary policy moves

Sam Fleming in Washington

© FT montage: AFP/Getty

The Trump administration is proving more willing to comment on Federal Reserve rate moves after saying little about central bank policy in its first year, in a development that risks unsettling financial markets.

Donald Trump has never made a secret of his appetite for cheap borrowing costs, calling himself a low-rates person. But in his first year as president his administration shied away from discussing the central bank’s decisions. This was partly under the influence of Gary Cohn, the former National Economic Council director, who understood the market sensitivity of its work.

Recently, officials have become more vocal. Peter Navarro, the president’s trade adviser, has made perhaps the most direct intervention, telling CNBC this month that he was “a little puzzled when the Fed announced three rate hikes before the end of the year”, arguing there was no inflation to speak of in the US economy. This week, Mr Trump used Twitter to accuse Russia and China of devaluing their currencies while the US “keeps raising interest rates”, saying the situation was not acceptable.

The administrations of Bill Clinton, George W Bush and Barack Obama steered clear of commenting publicly on monetary policy, judging that it would be better for investor confidence if they respected the central bank’s independence. Previous presidents have, on the other hand, been more willing to apply pressure on the central bank, among them George H.W. Bush, whose administration pushed for looser policy. Most notoriously, former Fed chairman Arthur Burns was pressured by the Nixon administration to keep the cost of borrowing cheap.

Mark Spindel, an investment manager and co-author of a book on the Fed called The Myth of Independence, said: “There has been a change in tone by the administration with regard to the Fed in recent weeks — we won't know the implications for some time. But the president will want to claim credit for good outcomes and find institutions to blame for bad ones. That may well put the Fed in the line of fire when things go wrong.”

Fed officials insist they would not be swayed if they come under any political heat. Asked on Monday by the Financial Times if he would ignore recent criticism, Robert Kaplan, the president of the Federal Reserve Bank of Dallas, said yes.

“Our job is to analyse the economy, to the extent humanly possible do that analysis devoid of political considerations or political influence, and then make sound decisions for the US economy,” he said. “It takes leadership to do that and I am quite confident that the Fed has that leadership and that is one of the reasons I came to the Fed.”

During the election campaign Mr Trump lashed out at Janet Yellen, the former Fed chairman, for keeping rates low, but he abruptly ceased his criticism after he came into office, calming markets. The recent interventions have on the whole been mild ones. But if the administration begins lashing the central bank more forcefully it could sow confusion in markets and force the Fed to demonstrate its independence, say some analysts.

Marc Sumerlin of Evenflow Macro, a former White House official under George W Bush, said the statements were early warning signs. “If the president appeared to be publicly dictating monetary policy it would force the Fed to publicly resist, and that is not a happy outcome for the financial markets,” he said. “It is a much better strategy to have any discussion on monetary policy in private, rather than putting public pressure on the Fed, which forces them to prove their independence.”

What makes the situation sensitive is the Trump administration’s predilection for hitching its fortunes to the stock market. If there were to be a significant sell-off, officials would probably look to shed the blame. For example, Steven Mnuchin, the Treasury secretary, in late March told Fox News Sunday that a stock market reversal in preceding days was partly down to the Fed. When he was asked if the Fed was raising rates too quickly, he said: “I respect Fed independence so I am not going to comment on that,” while adding that he believed the central bank is committed to not cutting off growth.

As a TV commentator Larry Kudlow, the new NEC director, regularly commented on monetary policy and his approach will be closely watched now he is in the White House. During the week he was named as Mr Cohn’s successor Mr Kudlow said he hoped the Fed did not overdo it by lifting rates too far. In his first roundtable with the media he went on to argue that faster growth does not cause inflation, and that the so-called Phillips Curve, which shows a trade-off between unemployment and price growth, does not exist.

The Fed is accustomed to being criticised by members of Congress, who regularly complain about its decisions in public hearings and statements to the media. The White House’s key lever when it comes to influencing the Fed is the right to make appointments to its board of governors.

The personnel decisions under Mr Trump have to date been broadly welcomed by markets. Jay Powell, the new Fed chairman, is seen as a pragmatic centrist on monetary policy. Richard Clarida was this week named as the nominee to be vice-chairman, with Michelle Bowman, a Kansas banking regulator, lined up as a governor.

The Federal Reserve Board declined to comment.

Additional reporting by Shawn Donnan in Washington.

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