The Federal Reserve seems determined to push interest rates even higher this week, but it’s facing increasing opposition from President Trump. While the Reserve wants to stick to its plan for regular rate rises, Trump and others are telling them to look at the evidence and decide if a rise is actually needed – which it pretty clearly isn’t. The Federal Reserve isn’t listening, though, and that means we could be heading for a financial showdown.
As the economy recovered from the financial crisis the Federal Reserve, like most other central banks around the world, kept interest rates low to encourage spending and boost retail and manufacturing. Also like most central banks, the Fed kept a close eye on how things were going and stood ready to raise rates if required, to prevent inflation from rising out of control.
- After the 2008 crash, interest rates stayed at a historic low for years. Early this year, however, the Fed decided it was time for a small rise. That was the first of four planned rises for 2018, and the first three happened without any problems. The economy was in the sort of shape where rate rises seemed like a good idea, and in any case the new rate was still low enough that it didn’t slow down sales.
- Now the situation is different – but the Fed doesn’t want to change course. They planned four rises and are determined to have them. The problem is that an overheating economy isn’t really a danger right now. In fact most of the world is seeing a slowdown. The US isn’t, but while the economy is still growing well it’s doing that without inflation. With no problem to solve, the president doesn’t understand why the Fed wants to push ahead with the solution. He tweeted, “It is incredible that with a very strong dollar and virtually no inflation, the outside world blowing up around us, Paris is burning and China way down, the Fed is even considering yet another interest rate hike. Take the Victory!”
- In case anyone thought this was a rogue tweet, White House trade advisor Peter Navarro spoke on the same theme a few hours later, saying the decision to keep raising rates was “crazy”. In a CNN interview he said that the Fed should look at the data, instead of just pushing on with the rise. With inflation close to zero, he said, the only reason he can see for the Fed to raise rates now is to show that they’re not controlled by the White House. If that’s true it’s unforgivable for the bank to play games with the American economy just to make a point.