In a rare move by a sitting U.S. president, Donald Trump has publicly criticized the Federal Reserve several times over the past month. Simply put, Trump isn't a fan of rising interest rates.
To be fair, some of Trump's criticisms make sense. It's more difficult to achieve stellar economic growth while rates are rising, and rising rates could be counterproductive to Trump's trade war. Here's a rundown of why Trump isn't happy with the direction of interest rates, why the Fed is raising rates in the first place, and whether the president's comments could cause the Fed to modify its monetary policy.
The Federal Reserve building in Washington, D.C. Image source: Getty Images.
Trump is "not thrilled" with rising rates
President Trump recently expressed his disagreement with Federal Reserve Chairman Jerome Powell and the rest of the Fed's directors over rising interest rates. As Trump said in a recent interview with Reuters, "I'm not thrilled with [Powell's] raising of interest rates."
This comes on the heels of comments Trump made in July, when he said he doesn't like to see rate hikes while his administration is doing so much work to boost the economy. More recently, Trump reportedly complained during a fundraising event about the Fed's heavy hand.
Why is the Fed raising rates?
Since Trump has become president, the Fed has hiked rates five times for a total increase of 125 basis points, or 1.25%, in the benchmark federal funds rate, which is the rate banks charge to lend money to other banks overnight. It has also indicated that it expects to raise rates twice more this year and three more times in 2019.
Why all the rate hikes? Well, the purpose of the Fed's monetary policy changes is to stabilize the economy. Lower interest rates are intended to kick-start economic activity; businesses can obtain lower-cost financing for expansion and hiring, while consumers can borrow and spend money at lower interest rates. So, when the economy is doing poorly or simply needs a boost, the Fed tends to lower interest rates.
On the other hand, if the economy is strong, the Fed uses interest rate hikes to cool things off and prevent the economy from overheating. An "overheated" economy can lead to runaway inflation, so it's something the Fed keeps a close eye on.
The Fed's recent (and projected near-term) rate hikes are a response to the robust economic growth we've been seeing for over eight years. Unemployment is extremely low, and growth is solid. Plus, rates had been at near-zero levels for years in the aftermath of the financial crisis.
Why does Trump want rates to stay low?
Simply put, Trump is afraid that rising interest rates could be counterproductive to his administration's efforts to stimulate economic growth.
Given his current trade initiatives, Trump is worried that the rate hikes will strengthen the dollar and cause larger trade deficits at a time when he's using tariffs as a weapon to attempt to reduce trade deficits.
In addition, rising rates can curb consumer spending, as they increase the cost of borrowing money. Credit card interest rates are directly tied to the federal funds rate, and although auto loan and mortgage rates are not, they do tend to move in the same direction. Many of the actions taken during the Trump administration -- such as the tax reform bill, the rollback of banking regulations, and others -- are intended to stimulate the economy. Trump simply feels that these initiatives would produce even higher growth if the Fed would stop raising interest rates.
To be fair, he's probably right. Tax reform, looser regulations, and near-zero interest rates would likely boost economic growth even further. However, the Fed's goal is not simply to grow the economy as quickly as possible; it's to encourage stability.
What it could mean to you
To be clear, it is unusual for a president to comment on monetary policy. In fact, we haven't heard a president criticize (or support) the Fed's interest rate movements since George H.W. Bush in 1992.
Another key point Americans should know is that the Fed is an independent institution and does not answer to the president. Monetary policy is set by the Federal Open Market Committee (FOMC), the main decision-making body of the Federal Reserve. The presidents of the nation's 12 regional Federal Reserve banks aren't even appointed by the president of the United States. In his July comments, Trump even said that he's "letting them do what they feel is best." And a subsequent statement by the White House reiterated that the president is not trying to interfere with the Fed's policy decisions.
The Federal Reserve's primary objective is to do whatever is in the best interest of economic stability -- not winning trade wars or achieving stellar GDP growth in any given quarter. And there's no reason to believe the president's criticism will supersede that objective.
