Despite Trump's rebuke, US Fed to continue steady course

This article is more than 12 months old

WASHINGTON: Despite booming growth in the US economy, the Federal Reserve is set to leave lending rates untouched.

But the central bank, which begins its two-day policy meeting tomorrow, is widely expected to hike interest rates twice more this year, as inflation rises and the jobless rate falls.

This has not gone down well at the White House. President Donald Trump earlier this month publicly chastised the Fed for raising interest rates, which, he says, counteracts the economic benefits of tax cuts.

That political interference is casting a shadow over the Fed.

After boosting the benchmark lending rate in March and June, it has seen the US economy humming along, with inflation at last hitting the two per cent target rate.

Most economists say the central bank has every reason to stick to its current course of gradual increases, which has seen the federal funds rate rise seven times since December 2015.

Futures markets overwhelmingly expect rate hikes in September and December this year, with the probability only increasing after Friday's report that US GDP grew 4.1 per cent in the second quarter, the fastest pace in four years.

"The economy still looks pretty strong, more than strong enough to keep the unemployment rate coming down," said Jim O'Sullivan of High Frequency Economics.

Still, Mr Trump told CNBC he was "not thrilled" about the Fed's plans to continue tightening. "Every time you go up, they want to raise rates again," he told the network. "I am not happy about it. But at the same time, I'm letting them do what they feel is best."

Some observers accuse the president of brazenly trespassing on the Fed's independence.

Economists warn that politicising monetary policy invariably leads to misfortune. And the Federal Reserve is legally and fiscally separate from the federal government.

But Sarah Binder, a Brookings Institution expert on the politics of the Federal Reserve, said the Fed is still at the centre of the US political system.

"Although we call it a norm, this expectation that the president is going to refrain and restrain himself from commenting on the Fed's policies, it's really just a short-lived practice," she said.

"In that sense, Trump is just joining the political fray."

President Lyndon Johnson summoned Fed Chairman William McChesney Martin to his ranch after the Fed boosted rates in 1965.

President Richard Nixon bullied Mr Martin's successor, Arthur Burns, into holding rates low in the 1970s, ushering in the decade's disastrous inflation.

More than 20 years later, President George H.W. Bush publicly called on Fed Chairman Alan Greenspan to cut interest rates. Mr Bush later blamed Mr Greenspan for his defeat in the 1992 elections.

It was only under President Bill Clinton that the Fed's deliberations took on an air of inviolability.

The Fed has not reacted to Mr Trump's comments, pointing reporters instead to earlier remarks by current Chairman Jerome Powell, who said central bankers kept political independence "deep in our DNA". And analysts warned that openly challenging the Fed's independence could backfire.

Former Fed vice-chair Alan Blinder said he would have defied such interference.

If the Fed is seen as yielding to Mr Trump's pressure or overreacting by tightening policy more, markets could begin to second-guess their motives.

"We don't want either," Mr Blinder said. "It is foolish for the president of the United States to make their job harder." - AFP