WASHINGTON (Reuters) – With US stocks well below their record highs in September and key elections in less than two weeks, President Donald Trump has reinforced his criticism of US Federal Reserve interest rate hikes and Jerome Powell leads the central bank.
FILE PHOTO: US President Donald Trump watches as Jerome Powell, his candidate for US Federal Reserve Chairman, speaks at the White House in Washington, US, on November 2, 2017. REUTERS / Carlos Barria / File Photo / File Photo
Here are some key questions about Trump's verbal attacks.
What is Trump's criticism of the Fed?
Trump says the Fed is raising interest rates too fast, easing economic stimulus through tax cuts and deregulation, and making life difficult for the government as tariffs resulting from the US trade war with China and other countries begin to take hold.
In an interview with The Wall Street Journal, Trump also complained that the Fed, which has been steadily raising interest rates during its tenure, while holding most of President Barack Obama's term of office close to zero, makes it more difficult for the United States to pay off their debts.
Is there any evidence that the Fed is hindering the economy?
It is true that higher interest rates will bring the economy, which grew at an annualized rate of 4.2% in the second quarter, to twice the estimated potential. Many Fed leaders expect that higher borrowing costs will begin to stem growth after two or three more interest rate hikes. Overall, financial conditions have eased and unemployment has fallen to its lowest level in 49 years, although the Fed has raised interest rates three times under Powell. (Graphic: Trump's war (with words) about the Fed – tmsnrt.rs/2PlZ6jb)
What can Trump do to influence the policy of the Fed?
Indirectly, the US president can gradually change the composition of the political decision-making body by successive appointments, selecting candidates who prefer lower interest rates and a looser policy. However, the board members appointed by Trump have largely sided with Powell. Trump has nominated three more candidates to fill the remaining vacancies on the Fed's Board of Governors. Two of them – Kansas Banking Superintendent Michelle Bowman and former Fed employee Nellie Liang – are not known to have a strong preference for interest rate policy, while a third, Marvin Goodfriend of Carnegie Mellon University, is widely regarded as a proponent of higher interest rates.
Trump has no say in the appointments of regional Fed presidents, who control five of the nine current Fed policy votes. They would control five out of 12 votes once all the seats in the Fed board are occupied.
Trump could try to fire Powell "for good cause" under the Federal Reserve Act, although previous court rulings concerning other agencies show that policy disagreements would not meet such a standard. Given the uncertainty of the financial markets, a long-term option would be to persuade Congress to change the law to make it easier for the Fed chair to be fired.
Have other US presidents criticized the Fed and pressured them to change course, and with what effect?
In recent decades, the presidents of the United States have taken the Fed's policy out of their hands, but some in the distant past occasionally expressed their discontent or impatience with the central bank. George H.W. Bush blamed his then-election defeat in 1992 for Fed chairman Alan Greenspan, and Lyndon B. Johnson came into conflict with Fed chief William McChesney Martin in 1965.
Political scientist Sarah Binder of George Washington University, who published a book on the Fed's relations with elected officials, said that although Trump's tweets and media outbreaks attracted much attention, the personal demands of presidents in the 1960s and 1970s did not meet Chefs ,
Perhaps most significantly, President Richard Nixon replaced Martin with Arthur Burns, who yielded to pressure from the White House for low interest rates, which is widely regarded as a political mistake that fed galloping inflation.
How is the Fed responding and what are the risks of Trump's attacks?
So far, Trump's verbal salvoes have had no discernible effect on the Fed, which is sticking to its plan to gradually raise borrowing costs to levels that it considers more appropriate for a healthy, growing economy. One risk is that if Trump sticks to his criticisms, investors will start to wonder if the Fed will continue to hold its own, leading to uncertainty about the direction of US monetary policy and potentially damaging market confidence.
Reporting by Ann Saphir and Howard Schneider Additional reporting by Jonathan Spicer; Letter from Tomasz Janowski; Editing by Paul Simao