Trump Attacks the Fed as Stocks Fall and the Midterms Loom

President Trump responded to falling stock prices on Thursday by continuing to throw rocks at the Federal Reserve, which he has described as “crazy,” “loco,” “going wild” and “out of control” for slowly raising interest rates against the backdrop of a booming economy.

No other modern president has publicly attacked the Fed with such venom or frequency. Indeed, some scholars said the only close historical parallel was with President Andrew Jackson, who campaigned successfully in the 1830s to close the Fed’s predecessor, the Second Bank of the United States.

Mr. Trump’s pointed remarks reflect the high political stakes less than a month before midterm elections that have been cast by his political opponents as a referendum on his presidency. Mr. Trump has been riding the economy hard, bragging about job creation, tax cuts and reduced federal regulation, and claiming credit for the rise of the stock market. Now that the market has lost 5 percent of its value in the last week, Mr. Trump is insisting someone else is to blame.

The Standard & Poor’s 500 stock index closed at 2,728.37 on Thursday, down 2.06 percent.

In fact, despite the stock market’s plunge, the American economy continues to grow, which is what is prompting the Fed to raise interest rates and drawing the president’s ire. The Fed’s chairman, Jerome H. Powell, has said that the economy is in a “particularly bright moment” and that he sees no clouds on the horizon.

The stock market sell-off instead appears to reflect the movement of money into bonds, a normal consequence of higher interest rates since those securities pay more as rates rise; concern about the health of the global economy; and hesitations about the value of tech stocks.

But after hitching his political fortunes to the rise of the stock market, Mr. Trump is now looking to decouple himself from its fall. Republicans are instead emphasizing continued economic growth and the lowest unemployment rate since 1969.

So far, the president’s comments have made little impression on market expectations about Fed policy. Unlike Jackson’s concerted campaign, Mr. Trump’s attacks appear curiously unmoored from the policies of his own administration or the longstanding goals of the Republican Party. Mr. Trump’s own aides have insisted that the president’s remarks are personal musings, not an attempt to dictate policy.

The Fed has also brushed off the attacks; it still expected to raise rates in December for the fourth time this year.

Mr. Powell, selected for the job by Mr. Trump, said at a September news conference that Mr. Trump’s views would not influence the Fed’s decisions. “We don’t consider political factors or things like that,” Mr. Powell said. “That’s who we are, that’s what we do, and that’s just the way it’s always going to be for us.”

Mr. Powell emphasized that the decision to raise rates to a range between 2 and 2.25 percent was not intended to get in the way of continued growth. “My colleagues and I are doing all we can to keep the economy strong, healthy and moving forward,” he said.

A spokeswoman declined to comment on Thursday.

Some experts warned that a continued assault on the Fed could have long-lasting consequences.

Peter Conti-Brown, a professor of legal studies at the University of Pennsylvania and the author of a political history of the Fed, pointed to the example of the F.B.I., another institution Mr. Trump has repeatedly attacked by raising questions about the integrity of its decision making. Mr. Conti-Brown said technocratic institutions are insulated from political pressure by public confidence. If confidence erodes, it becomes harder for technocrats to resist the politicians.

The F.B.I. has seen a loss of leadership, an erosion of morale and an increase in congressional scrutiny.

“How long before the Fed is looking at its political context and saying, ‘We can’t stick our heads out as far as we need to,’” Mr. Conti-Brown asked rhetorically. “How long will people stay if the job itself becomes terrible, and there are protesters everywhere you go?”

Mr. Trump criticized the Fed when it raised interest rates in July, and again when it raised interest rates in September. But his attacks have sharply intensified in recent days, in tandem with the drop in the stock market.

“I think the Fed has gone crazy,” he told reporters on Wednesday afternoon. Later in the day, speaking with Fox News, he continued to increase the heat. “The Fed is going wild,” he said. “I don’t know what their problem is. They are raising interest rates and it’s ridiculous.”

“It’s not right,” he said Thursday. “It’s not necessary, and I think I know more about it than they do.”

Mr. Trump added that he was “disappointed” with Mr. Powell but did not plan to fire him — an authority the president may not even have. While the president in theory has the power to remove a Fed chairman “for cause,” courts have held that the permissible causes do not include policy disagreements.

For the moment, Mr. Trump’s criticism of the Fed does not seem to be catching on with Republican candidates. Many Republicans have argued for years that the Fed was waiting too long to raise interest rates, and then that it was moving too slowly. The party is trying to hold on to majorities in the Senate and the House by running on a strong economy and using the heated liberal opposition to Justice Brett M. Kavanaugh’s Supreme Court confirmation as an example of the threat Democrats pose if they control Congress. That dynamic could change, however, if the stock market continues to fall.

Modern presidents have always kept an uneasy eye on the Fed, because its decisions about monetary policy have a significant influence on the pace of economic growth.

Until the early 1950s, the Fed essentially operated as an arm of the Treasury Department. Even after the Fed gained operational independence, presidents often opined publicly about what the Fed should do and, if the Fed ignored their advice, they sometimes sought to bend its officials to their will.

President Lyndon B. Johnson protested a decision to raise interest rates in the late 1960s by summoning the Fed chairman at the time, William McChesney Martin, to his East Texas ranch and pinning the smaller man against a wall. President Richard M. Nixon instructed aides to blackmail Mr. Martin’s successor, Arthur Burns. President George Bush declared in a State of the Union address that the Fed should keep rates low.

But the volume of public commentary greatly diminished in recent decades as politicians concluded that pressuring the Fed was counterproductive. The administrations of Presidents Bill Clinton, George W. Bush and Barack Obama all made a policy of silence on monetary policy.

Krishna Guha, the head of the central bank strategy team at Evercore ISI, said he did not expect Mr. Trump’s remarks to influence the Fed, and he saw no evidence that markets were paying attention. But he added that if Mr. Trump did succeed, he would most likely regret doing so.

If Mr. Trump’s attacks convince markets that the Fed may move more slowly, or show greater tolerance of inflation, bond yields would rise, which would put further downward pressure on equity prices.

Still, Mr. Guha — formerly a senior official at the Federal Reserve Bank of New York — said that the president’s criticisms were not good for the central bank or the future conduct of economic policy.

“You never want to be in a position where some part of society doesn’t just question whether you made the right call or not, but whether you made that call in the public interest,” he said.

Mr. Trump’s aides have sought to play down his broadsides. Larry Kudlow, the president’s top economic adviser, said Mr. Trump was just offering his two cents. “I don’t think he’s ‘calling out the Fed,’ quote unquote,” Mr. Kudlow told reporters outside the White House on Thursday morning. “I really mean this. I think he’s giving you his opinion. He is a, obviously, successful businessman, he’s a very well-informed investor. He has his views. But he’s not saying to them, ‘Change your plan.’”

Mr. Kudlow added, “He knows the Fed is independent, and he respects that.”

Mr. Trump’s criticisms appear strangely at odds with the way he has handled the most powerful means at his disposal to influence monetary policy. Since taking office less than two years ago, he has had the unusual opportunity to fill six of the seven seats on the Fed’s board of governors.

He filled the top three positions on the Fed’s board, including the chairman’s job, with members of the Republican policymaking establishment, which has long been committed to keeping inflation firmly under control. Three other nominees, still awaiting confirmation, are a more diverse group, but there is no indication any share Mr. Trump’s stated opposition to raising interest rates.

“In most areas of administrative policy that have been highly politicized, his appointments have privileged politics over competence,” Mr. Conti-Brown said. “The Fed has been an exception.”

A looming question, he said, is whether Mr. Trump might begin to match his actions to his words.

[The New York Times]

Trump Has Done Complete 180 on Fed Chair Yellen

President Trump’s interview with The Wall Street Journal played out along a week-long spectrum of policy shifts that prompted an unprecedented use of the word “whiplash” in the Washington pundit class.

Sandwiched between salacious stories about White House palace intrigue (Steve Bannon in or out?), increasing risks of military conflict with North Korea and the use of a really big bomb in Afghanistan, were notable economic and financial policy pronouncements.

These included his support for renewing the U.S. Export-Import Bank, recognition that China is not currently guilty of “currency manipulation” and expressing new-found nuance about the double-edged benefits of U.S. dollar strength. All represent important and welcome steps along the presidential learning curve.

But the economic revelation with the most far-reaching impact was the president’s apparent willingness to consider re-appointing Janet Yellen to a second term as chairwoman of the Federal Reserve.

During the campaign, Trump had accused her of being overtly political, having artificially created a bubble to support the Obama agenda, having undermined retirees’ savings and bluntly stated that he “would most likely replace her.” So when he told the Journal that he liked her and rejected the assertion that her chairmanship was “toast,” one could argue that this was a huge surprise.

In fact, Trump’s potential support for Yellen could easily have been foreseen. Of all the alternative potential Fed chair candidates currently being promoted by the president’s party, none would provide the president with the experience and the steady hand that Yellen’s reappointment would present. Still, neither experience nor stability have been highly prized by President Trump.

What is important are her previous statements, intellectual leanings and actual actions taken at the helm of the central bank that make it abundantly clear that a second Yellen Fed would be more cautious about aggressively hiking rates that could risk Trump’s own economic growth agenda than would any GOP-favored conservative candidate to take her place.

The fact is, for all the focus on foreign and social policy issues, Trump, like others before him, may find his political fortunes could turn on whether he can maintain and even accelerate the economic expansion he inherited from his predecessor.

He will also quickly learn that political success is often linked to figuring out how to give the people what they want while also figuring out how to pay for it. Or, if you can’t pay for it, how to borrow, preferably, on the best terms possible. That is one of the few areas where the president’s previous experience and skill set should serve him well.

In spite of Republican assertions that they would be the party to rein in the debt, the most likely outcome of budget negotiations and tax reform is either continued stalemate and paralysis or spending money on things people want and not entirely paying for them. The GOP may squeal, but borrowing and spending is in Trump’s blood.

Even Office of Management and Budget Director Mick Mulvaney, formerly of the House Freedom Caucus, called the president’s promises to cut the federal debt “hyperbole” and argued that he was not concerned about the budget deficit impact of either infrastructure spending or tax reform, two of the largest and costliest government reform initiatives currently contemplated by the administration.

One of the many new complexities Trump is grappling with is the fact that the portion of the Fed’s mandate for price stability and its independence to pursue that mandate often conflict with fiscal efforts to stimulate growth and spend to achieve political goals. Monetary policy can be used as a dampener on broad fiscal expansion efforts precisely by design.

In fact, efforts to strip some independence from the Fed stem not from a political desire to force the Fed to loosen its potential policy constraints on potentially expensive government spending but from ideological conservative opponents of the Fed’s failing to more aggressively use monetary policy to constrain overheated economic growth, not from doing so too often.

Republican critics of Janet Yellen’s leadership argue that she has not already taken the punch bowl away, not that she has done so too quickly. President Trump is quickly learning that his stated affection for “the low interest rate policy” is not necessarily in line with the views of many conservative candidates jockeying for position to succeed Yellen.

Of all the rumored names in the running to become Trump’s Fed nominee, all are more hawkish on monetary policy than the current chair. Among the names circulating is that of John Taylor, whose eponymous Taylor Rule many conservatives would like to see enacted into law, potentially resulting in steeper and faster rate hikes than even the most hawkish of other candidates have proposed.

Perhaps to gain favor with the president’s less hawkish leanings, potential candidates are said to be circling within the Washington and New York power bubbles, now arguing that they would not actually be as hawkish as their previous rhetoric might suggest.

Janet Yellen’s tenure at the Fed has been one of the most difficult in modern Fed history. Yellen inherited from her predecessor, Ben Bernanke, monetary policy that had migrated into highly unorthodox territory, as a means of stabilizing and growing an economy decimated by the housing crisis and the great recession.

Yellen’s task was to plot and execute an exit from unorthodox monetary policy, while balancing the need to restore fragile economic confidence, reduce unemployment, maintain acceptable inflation and grapple with global financial stability risks that could have undermined the U.S. recovery.

By any measure, Chair Yellen’s measured tapering and return to more conventional monetary policy has been a triumph of prudence and balance. Perhaps it is her steady hand and experience that have begun to enamor her to Donald Trump. Perhaps it is a surprising personal chemistry that was sparked in their two reported face-to-face meetings, maybe the result of their common New York outer-borough roots.

Or, perhaps it is simply that President Trump is focused on the one thing he knows well: money and the cost of debt. Under Yellen, the Fed is projecting two more hikes in 2017 and three more next year, with perhaps as many as four the year thereafter.

Even a monetary policy neophyte like our president is quickly becoming aware that any conservative alternative to Yellen will likely promote a less cautious, steeper and more rapid hawkish monetary policy agenda that could endanger his economic growth story and raise the costs of his potential spending plans.

Seen through that prism, President Trump’s potential support for reappointing Janet Yellen was not surprising at all.

(h/t The Hill)

Trump Says Fed Policy He Supported is Now a Partisan Conspiracy

In May, Donald Trump thought the Federal Reserve handled interest rates exactly right.

“Right now I am for low interest rates, and I think we keep them low,” he told CNBC.

Today, he said Fed chair Janet Yellen’s interest rate decisions proved she was “obviously not independent” from the White House and was, in fact, a partisan conspirator out to help Democrats.

“It’s staying at zero because she’s obviously political and she’s doing what Obama wants her to do,” Trump told CNBC on Monday. “And I know that’s not supposed to be the way it is, but that’s why it’s low.”

In an interview last week with Reuters, Trump said the low rates had created a “false economy,” adding, “at some point the rates are going to have to change.”

What changed between May and today? Nothing. The Fed has the same policy of low interest rates that Trump gushed over just four months ago. They last voted to raise rates in December 2015, the first time in nearly a decade, although there’s speculation among analysts that they could raise them this month.

Like a lot of Trump’s flip-flops, it’s not clear what prompted the shift. But it’s hard to reconcile Trump’s comments from springtime, where he warned of terrible economic consequences from an interest rate hike, with his comments today.

Trump repeated his strong support for a low interest rate policy throughout his May interview with CNBC, warning that “one point more, even, is devastating” and that “we have to be very, very careful” about making changes as a result.

While he said he planned to replace Yellen when her term expired, he described her at that time as a kindred spirit on the issue.

“She is a low interest rate person, she has always been a low interest rate person, and I must be honest — I am a low interest rate person,” Trump told CNBC on May 5. “If we raise interest rates and if the dollar starts getting too strong, we’re going to have very major problems.”

He gave Fortune a similar assessment in April, saying a rate increase would be “scary” for the economy.

“The best thing we have going for us is that interest rates are so low,” Trump said. “There are lots of good things that could be done that aren’t being done, amazingly.”

On Monday, those substantive arguments for low interest rates had disappeared in favor of wild accusations of shady behavior around the same course of action.

“She’s keeping them artificially low” to boost Obama, he said. “Watch what’s going to happen afterwards, it’s a very serious problem. And I think it’s very political. I think she’s very political. And to a certain extent, I think she should be ashamed of herself.”

This isn’t the first time Trump has lurched erratically between extremes on the issue. He also accused Yellen of refusing to raise rates for political reasons last November.

“Janet Yellen should have raised the rates,” Trump told reporters. “She’s not doing it because the Obama administration and the president doesn’t want her to.”

The Fed voted to raise rates the next month.

Bumps in the economy tend to hurt the party in power, and partisans often grumble around election time that low interest rates are helping incumbents. Already, markets have been shaky this week as investors increasingly believe the Fed might announce a rate increase, which could slow growth in the short term in order to guard against inflation.

Whatever his motive, Trump’s comments drew a brush-back from Minneapolis Federal Reserve President Neel Kashkari, who is a Republican.

“Politics simply does not come up,” Kashkari said on CNBC Monday. “We look at the economic data and … everyone around the table is committed to achieving our dual mandate of employment and inflation.”

(h/t NBC News)

Reality

With the many other flip-flops since becoming the Republican party’s nominee, Trump rejected almost every stance that his supporters loved which separated him from the other Republican primary candidates.