President Donald Trump’s 24-hour bashing of the Federal Reserve is unlikely, for now, to shake the central bank’s standing among its two key constituencies that matter more: financial markets and Congress.
“If anything, the Fed has been gradual and their actions have been well received thus far,” said Vincent Reinhart, chief economist at Standish Mellon Asset Management Co. and a former Fed official. “To criticize what the Fed has done is out of line with how the market has reacted to what the Fed has done.”
Trump on Wednesday said “the Fed has gone crazy” with interest-rate increases this year and doubled-down on Thursday, blaming the nation’s “out of control” central bank for a sixth straight day of losses in U.S. equities. Still, he said, “I’m not going to fire him.”
The president’s broadside is a direct challenge to the Fed’s three-decade-long campaign to build and maintain its credibility fighting inflation, an effort that has helped produce the two longest U.S. economic expansions on record. After the barrage of complaints from Trump in the past 24 hours, financial markets don’t see Fed Chairman Jerome Powell bending to the pressure to slow rate hikes and risk an inflation outbreak.
A market-based gauge of the annual U.S. inflation rate for the next decade -- the 10-year breakeven rate -- declined this week to 2.13 percent from close to a four-month high of 2.17 percent reached last week.
Trump’s politicking with interest rates has the potential to backfire. Inflation credibility is the foundation of modern monetary policy partly because it gives investors confidence in, and predictability about, the future. Lose that credibility to keep prices in check and bond investors look to sell, pushing up borrowing costs and slowing the economy.
For a president who has frequently invoked rising stock prices as affirmation for his economic policies, criticism of the Fed lays ground for shifting blame elsewhere if the market slide continues. He’s escalating his attacks less than a month before elections that will determine whether Republicans maintain control of Congress.
Under the guidance of Powell, Trump’s pick to lead the central bank, and his predecessor Janet Yellen, Fed officials have raised rates six times since Trump’s inauguration in January 2017. They’ve also signaled their intent to hike again in December and three more times next year, assuming the economy continues to grow moderately and inflation stays in check.
Markets have taken each hike in stride, including the most recent rate increase on Sept. 26.
Atlanta Fed President Raphael Bostic on Wednesday repeated what’s become a mantra for Fed officials when asked about Trump’s remarks, saying, “at the end of the day we have to do what we think is best. That is what I try to do.”