Last Thursday, President Donald Trump broke with tradition and criticized the Federal Reserve’s plan to raise interest rates.
Historically, presidents have refrained from speaking specifically about monetary policy. On CNBC, Trump said: “I am not happy with it (interest-rate increases). But, at the same time, I’m letting them do what they feel is best.”
So far this year, the central bank has raised interest rates twice, to a range of 1.75 percent to 2 percent. The markets anticipate two more increases this year.
Analysts do not feel that President Trump’s comments were likely to sway the Fed’s rate-setting decisions, because the Federal Reserve is an independent body. Investors historically have supported the Fed’s independence because they believe that its officials will make unpopular decisions in order to achieve what are in the long-run best interests of the economy.
Currently, policymakers are concerned that our inflation rate might exceed the 2 percent goal set as healthy for growth but not so high as to hurt the economy.
The central bank has in recent years raised interest rates from their historic low levels set to help the economy after the Great Recession. Higher rates help cool an expanding economy in which unemployment has fallen to the lowest levels in decades. On CNBC, Larry Kudlow, the president’s top economic adviser, predicted that the U.S. gross domestic product could exceed 4 percent for the next two quarters. The unemployment rate might drop to 3.5 percent by the late this year.
The president also is frustrated that rising interest rates have caused the U.S. dollar to strengthen against other currencies. A strong dollar hurts the U.S. trade balance because it makes our goods relatively more expensive on the world markets. The president told CNBC: “China, their currency is dropping like a rock. Our currency is going up. I have to tell you, it puts us at a disadvantage.”
In response to Trump’s comments, Fed Chairman Jerome Powell said he was not worried about political pressure from the White House. Powell said in an interview with American Public Media’s “Marketplace” radio program: “We do our work in a strictly non-political way, based on detailed analysis, which we put on the record transparently.”
There are historical precedents of White House interference in the Fed’s work. Then-President Ronald Reagan nominated several governors who outvoted then-Fed Chairman Paul Volker in a rare rebuke, for instance. But presidential interference is unusual. Under the Clinton, George W. Bush and the Obama administrations, the White House did not second-guess or interfere with the Fed’s monetary policy decisions.
On a related front, however, analysts are worried that our yield curve is flattening. That is the gap between short- and long-term Treasury rates, which have narrowed to about 20 basis points (100 basis points equal 1 percent). The flattening yield curve raises concerns that the Federal Reserve’s interest rate increases could be hitting the brakes on our economy so hard that it could inadvertently put the United States into another recession.
When it comes to Federal Reserve policy and interest rates, my 35-year career as a fixed-income trader gives me some meaningful insight.
First of all, by any standard, our interest rates still are very low. Currently, the 10-year Treasury is below 3 percent. During my career, the 10-year Treasury averaged close to 7 percent. Thus, interest rates need to rise considerably before I am concerned that they will meaningfully hinder economic growth.
Secondly, while a flat yield curve has on occasions predicted a recession, the current strength of our economy makes me discount that concern. Frankly, President Trump’s trade policies are more likely to curb growth and increase inflation than a flat-yield curve will.
Lastly, I believe that Congress’ establishment of the Federal Reserve as an independent central bank has served this country quite well over the past century and it should continue to be allowed to do its work.
Originally published in the Sarasota Herald-Tribune
