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Mnuchin reaffirms Fed’s independence after Trump complaints on rates
WASHINGTON, July 30, 2018 (BSS/AFP) – US Treasury Secretary Steve Mnuchin
offered assurances Sunday over the independence of the Federal Reserve as it
heads into a two-day policy meeting that is expected to leave interest rates
untouched despite a booming US economy.
In an appearance on Fox News Sunday, Mnuchin touted the economy’s
performance as being on a path of rapid, sustainable growth after stellar 4.1
percent growth in the second quarter.
But he also was forced to allay concerns raised by President Donald
Trump’s recent, eyebrow-raising complaints about Fed moves to raise interest
rates.
“We, as an administration, absolutely support the independence of the Fed,
and the president has made it clear that this is the Fed’s decision,” Mnuchin
said. “Let me be clear, he absolutely respects the independence of the Fed.”
Presidents usually refrain from public comment on the Fed’s business, but
that did not stop Trump from publicly chastising the bank earlier this month.
“I don’t like all of this work that we’re putting into the economy and
then I see rates going up,” he said in an interview with CNBC on July 20.
The central bank is expected to hold its fire on interest rates at its
two-day policy-setting meeting, which begins Tuesday.
But it is widely thought to be ready to raise rates twice more this year
as inflation mounts, the jobless rate falls and the economy continues to
soar.
After boosting the benchmark lending rate in March and June, the US
economy has continued humming, with inflation at last hitting the Fed’s two
percent 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, with the probability only increasing after Friday’s blockbuster GDP
report.
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“At least right now, the economy still looks pretty strong, more than
strong enough to keep the unemployment rate coming down,” Jim O’Sullivan of
High Frequency Economics told AFP.
While most economists expect growth to slow in the rest of the year,
Mnuchin predicted annual growth of at least three percent well into the
future.
“So I don’t think this is a one- or two-year phenomenon,” he said. “I
think we definitely are in a period of four or five years of sustained three
percent growth at least.”
Still, Trump told CNBC he was “not thrilled” about the Fed’s plans to
continue tightening and took to Twitter to say America should be allowed to
recoup the losses before rates rise again.
“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.”
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 despite its legal status, the Fed sits at the center of
the political system.
– Joining the fray –
“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 told AFP.
“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.
Nixon bullied 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 — and later blamed
Greenspan for his defeat in the 1992 elections.
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It was only under President Bill Clinton that the Fed’s deliberations took
on an air of inviolability.
The Fed has not reacted to 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 told AFP he would have defied such
interference.
“My attitude would have been, and I believe the attitude of most members
of the Federal Open Market Committee would have been, to stiffen our backs
and show that we’re not taking instructions from the White House.”
And Blinder said Trump’s interference could create static in the Fed’s
efforts to signal its intentions to markets — which prevents undue turmoil
when a new move is announced.
If the Fed is seen as yielding to Trump’s pressure or overreacting by
tightening policy more, markets could begin to second-guess their motives.
“We don’t want either,” Blinder said. “It is foolish for the president of
the United States to make their job harder.”
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