Won't flinch

Fed signals it won't flinch following Trump criticism on rates

By VICTORIA GUIDA

The Federal Reserve on Wednesday signaled that it still intends to raise interest rates next month, despite increasing public pressure from President Donald Trump to keep rates low.

According to newly released minutes from the most recent meeting of the Fed’s rate-setting committee, the central bank said it “would likely soon be appropriate” to hike rates again if economic data continue in line with expectations. The committee meets next on Sept. 25-26.

The central bank stuck to its mantra that any decisions would take into account a range of data, including on inflation, the labor market, financial conditions and international developments. There was not even an implicit mention of Trump’s July 19 comments that he was “not thrilled” about the Fed’s rate hike campaign. The meeting took place July 31-Aug. 1.

“I don’t like all of this work that we’re putting into the economy and then I see rates going up,” Trump told CNBC in July. He underscored that sentiment in an interview with Reuters on Monday, in which he said he would criticize the Fed if it continued to raise rates.

The Fed zealously guards its ability to make monetary policy decisions free from short-term political pressures, a key feature of its structure. Chairman Jerome Powell, a Trump appointee, has repeatedly emphasized the importance of the central bank’s independence.

Trump can remove a member of the Fed board only “for cause,” which does not include policy disagreements. Still, continued public criticism from him could embolden the central bank’s critics in Congress — a result that could have more practical impact on the Fed. Yet Republicans are more likely to advocate that rates be higher, not lower.

Trump aside, the central bank also faces a number of complex economic dilemmas that could affect the pace of rate hikes going forward. Fed officials worried that prolonged and escalating trade disputes could slow the economy while also stoking inflation by pushing up prices, according to the minutes. That scenario “presented a challenge in determining the appropriate monetary policy response.”

Most of the Fed’s business contacts “had not yet cut back their capital expenditures or hiring but might do so if trade tensions were not resolved soon,” the minutes state.

Some officials expect wage growth to finally pick up “before long,” the minutes state, citing discussions with businesses that “now exhibited greater willingness to grant wage increases.” A pickup in wages could also increase inflation, bolstering the case for continued rate hikes by the Fed, unless it’s coupled with increased productivity.

Keeping rates low is also risky for the financial system because it can encourage financial institutions to make riskier investments to turn a profit, since they earn less interest on loans.

A few Fed officials argued that the central bank should require large banks to raise more capital while times are good to help ensure they have enough of a buffer to avoid failure in the event of a financial crisis.

Powell also suggested that the committee discuss its methods for implementing monetary policy in the fall. Richard Clarida, Trump’s nominee for Fed vice chairman, would be an important voice in that conversation if he is confirmed by the Senate by then.