WASHINGTON (Sinclair Broadcast Group) -- President Donald Trump and the former chairman of President Barack Obama’s Council of Economic Advisers rarely agree on much, but as the Federal Reserve debates whether to raise interest rates this week, both have argued the time has come to pause the steady escalation of rates that began last fall.
“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,” Trump tweeted Monday.
Jason Furman, who chaired Obama’s economic council from 2013 to 2017, made a more detailed case for halting the climb in a recent Wall Street Journal op-ed.
“One reason the economy is so strong now is that the Fed has been willing to change its mind as the facts develop. That adaptability makes policy more predictable, not less, because it enables monetary policy to act as a hedge against economic developments,” Furman wrote.
The push to slow rising interest rates has aligned the president with an unusual array of conservative and liberal economists amid uncertainty about the future of the U.S. economy, growing signs of a global economic slowdown, and bubbling stock market volatility.
A two-day meeting of the Fed’s Open Market Committee convened Tuesday, and Chairman Jerome Powell is widely expected to announce an increase in the benchmark interest rate Wednesday. That move would mark the fifth consecutive quarter of rising rates, and officials have forecast three more rate hikes in 2019.
According to Paul Kupiec, a resident scholar at the American Enterprise Institute, the Fed’s decision Wednesday will be based on determining “how the economy is running relative to its capacity.”
“They look at the unemployment rate and where they think the full-employment unemployment rate is, how low the unemployment rate can go before it starts goosing inflation,” he said.
The Commerce Department reported inflation rose by 1.78 in the 12 months ending in October, and the unemployment rate held steady at 3.7 percent in November. Neither figure suggests the economy is running too hot.
Part of the challenge for the Fed is that, at this point, nobody knows when the economy will hit full employment and inflation will kick in. Many experts used to think that threshold was around 4.5 to 5 percent, but unemployment has been below 4 percent for months and there still appear to be more jobs available than people looking for work.
“The Fed has a dual mandate,” said Phil Levy, a senior fellow on the global economy at the Chicago Council on Global Affairs. “It’s supposed to focus on two things: price stability and full employment. The reason it’s tricky for the Fed is sometimes these things happen with a lag. By the time you actually have inflation, it’s harder to fight it.”
Inflation is still below the Fed’s 2 percent target, but wage growth has climbed to its highest rate in several years, sparking fears accelerated inflation is on the horizon.
“They’ve seen this unusually low unemployment, they’ve seen wages start to go up, and they’re thinking we want to stay ahead of this,” Levy said.
The health of the job market is not the only measure the Fed considers. Several factors have led economists to recommend pausing the escalation of rates, even though the current 2.25 percent rate is still relatively low historically.
“The Fed is trying to raise rates back to what it considers to be a normal rate. The rates have been unusually low from the end of 2008 to 2015,” said James Butkiewicz, an economics professor at the University of Delaware.
In the wake of the bank bailout in 2008, the Fed cut interest rates to .025 percent and held them there until late 2015 as the economy slowly recovered from the Great Recession. With economic growth surging this year after the 2017 tax cuts, officials are now tapping the brakes with rate hikes.
“What they’re trying to do is keep the economy moving along at a healthy pace without it overheating,” said Dean Baker, senior economist at the Center for Economic and Policy Research.
When the global economy looked strong and stable, it seemed like a good time to bring rates up, but as the economies in Europe and China stumble, the Fed may have to reconsider. A strong dollar and Trump’s tariff policies have slowed trade activity as well.
Another reason economists are urging caution is that the stock market is stumbling through its worst December in decades. According to Bloomberg, the Fed has not tightened interest rates in a plummeting market like this since 1994.
Even if Fed officials conclude rates do not need to go up, Baker does not expect them to pause this quarter because the Fed has telegraphed an increase for months. Instead, he will be watching for a statement on plans for 2019 that will likely include fewer projected increases.
“They’re kind of locked in. They don’t like to surprise the markets,” he said.
At the last Federal Reserve meeting in early November, officials expressed confidence in the economy and offered no indication it planned to pause the escalation of rates this quarter. Minutes from the meeting stated “almost all participants” agreed a rate hike would be warranted unless there are unforeseen developments.
Whether it happens this quarter or not, experts do expect the Fed to pause rate increases soon. Butkiewicz noted some research indicates the full effects of rising rates are not felt until a year after they increase, so the ramifications of last fall’s rate hike are just now becoming fully apparent.
“There are those who just feel maybe the Fed needs to pause and see how the economy responds,” he said.
Rising interest rates have many direct and indirect impacts on Americans’ lives, but a 0.25 percent hike Wednesday likely would not result in any dramatic immediate changes.
“The rates generally feed very quickly into things like credit card rates, auto loan rates. They tend to not feed very quickly into the interest people earn on their savings accounts,” Kupiec said.
Consumers will not pay the federal funds rate the Fed sets Wednesday, but the rates they see on loans and credit charges are directly influenced by those numbers. Higher mortgage and auto loan rates are already contributing to a slowdown in economic activity in those sectors.
“People borrow money and the interest rates they pay on their loans will affect how much they want to borrow,” Butkiewicz said.
Fewer home sales mean less construction work, fewer appliance and furniture purchases, and downstream effects on stores and restaurants. As interest rates go up, businesses also become more selective in their spending and borrowing.
On Tuesday morning, President Trump urged Fed members to read a Wall Street Journal editorial arguing against an interest rate increase, adding, “Feel the market, don’t just go by meaningless numbers. Good luck!”
White House Press Secretary Sarah Sanders defended the president’s attacks on the Fed Tuesday, insisting he is just sharing his opinion.
“He's been very clear about what his position is, while at the same time he understands that the Fed is an independent agency. That doesn’t take away the President's right to state his opinion on a particular matter,” she said at a press briefing.
If Trump truly believes the Fed should stop interest rate hikes, experts say tweeting out his demands and insulting Chairman Powell may prove counterproductive. The Federal Reserve is a fiercely independent agency, and investors count on that independence to ensure political considerations will not influence its decisions.
“It’s kind of a big psychological game with markets. If markets believe the Fed is independent, they have a lot of confidence in Fed policy By President Trump coming in and jawboning the Fed to keep rates lower, it’s kind of made it more difficult at this point for the Fed to back off the rate hikes,” Kupiec said.
If Powell concurs with Trump, Furman, and others that conditions do not justify raising rates at this moment, he will now need to weigh the long-term consequences of a perception that the president bullied the Fed into changing course.
“The president is absolutely making their job a lot harder,” Levy said. “They’re trying to peer into the future and see how you set economic policy. There’s a real danger if they decide, ‘The economy is slowing, we need to stop raising rates,’ it will look like they’re caving to the president.”
A president gets to influence Fed policy by appointing the chairperson and members of the board of governors, as Trump did when he installed Powell in place of Janet Yellin. Once those people are in place, though, most recent presidents have typically trusted their judgment.
Not all of them, though. According to Butkiewicz, President Richard Nixon attempted to exert influence on his Fed chairman in 1971 ahead of the 1972 election. Nixon did get re-elected, but artificially low interest rates contributed to high inflation, high unemployment, and low economic growth for years afterward.
Butkiewicz is confident the current Fed will be able to tune out Trump’s attacks and assess the economy objectively.
“A lot of people on the committee are pretty open-minded and they’re going to do what they think is best for the economy,” he said.
If Trump wants to make a case for lower interest rates, Baker said he can have the White House Council of Economic Advisers put together evidence and make a convincing argument, rather than demanding it himself on Twitter.
“It’s totally appropriate to have public debates on monetary policy,” he said. “The Fed’s not a church It’s inappropriate for him to say, ‘I’m the president. Don’t do it.’”