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Federal Reserve chief defends raising interest rates, signaling Trump can't pressure him

Federal Reserve chief defends raising interest rates, signaling Trump can't pressure him
From left, Esther George, president of the Federal Reserve Bank of Kansas City, John Williams, president of the Federal Reserve Bank of New York, and Jerome H. Powell, chairman of the Federal Reserve, walk together at a central bankers conference in Wyoming on Friday. (Jonathan Crosby / Associated Press)

Federal Reserve Chairman Jerome H. Powell on Friday defended the central bank’s policy of gradually increasing a key interest rate and signaled that the hikes will continue, brushing off President Trump’s recent public criticisms.

Powell did not mention Trump in a speech at a central bankers conference in Jackson Hole, Wyo. But speaking publicly for the first time since Trump said last month that he was “not thrilled” with recent rate hikes, Powell indicated the Fed plans to continue its efforts to normalize interest rates that had been kept historically low to fight the Great Recession.

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“I will explain today why the committee’s consensus view is that this gradual process of normalization remains appropriate,” Powell said of the rate-setting Federal Open Market Committee.

Among the questions he addressed in the speech was: “With no clear sign of an inflation problem, why is the FOMC tightening [monetary] policy at all, at the risk off choking off job growth and continued expansion?”

Powell did not directly reassert the Fed’s legal independence from the White House. But, as he did with rate hikes, he signaled that Fed officials would do what they think is right for the economy regardless of political pressure.

“The economy is strong. Inflation is near our 2% objective, and most people who want a job are finding one,” Powell said.

“My colleagues and I are carefully monitoring incoming data, and we are setting policy to do what monetary policy can do to support continued growth, a strong labor market, and inflation near 2%,” he said.

With the economy growing at a 4.1% annual rate in the second quarter of the year and inflation rising, Fed officials have forecast that they will continue to slowly raise a key short-term interest rate.

Based on the futures market, investors are almost certain Fed policymakers will inch up the rate again when they meet in late September. The rate now is at a target between 1.7% and 2%, well above the near-zero level the Fed kept it at from late 2008 to 2015, but still historically low.

All the Fed policymakers at the meeting said U.S. trade disputes with China and other countries created “an important source of uncertainty and risks.”

In a Reuters interview this week, Trump repeated his public comments from last month that he was “not thrilled” that Powell was slowly raising the Fed’s historically low benchmark interest rate.

Although Trump has frequently boasted incorrectly that the U.S. economy is doing better than it ever has, he complained that “I should be given some help by the Fed.”

Asked in the interview whether he believed in the Fed’s independence, Trump responded, “I believe in the Fed doing what’s good for the country.”

The last time a sitting president publicly criticized the Fed on interest rates was in June 1992. Pressure more often has come behind the scenes.

White House audio recordings show that President Nixon pressured then-Fed Chairman Arthur Burns to keep interest rates low to boost Nixon's reelection chances in 1972. Burns did, and the move is widely believed to have helped fuel a decade of high inflation.

Powell appeared to point toward that experience in his Friday speech as he reviewed Fed experiences that were shaping his thinking.

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“Around 1965, the United States entered a period of high and volatile inflation that ended with inflation in double digits in the early 1980s,” Powell said. “Multiple factors, including monetary policy errors, contributed to the Great Inflation.”

Powell didn’t mention political pressures, citing instead “a key mistake” of Fed officials not correctly determining that the labor market was tighter than they thought.

Presidents typically have steered clear of public criticism of the Fed to preserve its independence, which is crucial to investor confidence in its actions.

The Fed has been slowly inching up its key interest rate because the U.S. economy is doing better.

Since Powell took office, the central bank has raised the rate twice — by 0.25 of a percentage point each time — in a process known as monetary policy tightening.

The Fed now has raised the federal funds rate by 0.25 of a percentage point seven times since December 2015 after holding the rate at an unprecedented level of near zero for seven years in an attempt to fight the Great Recession and the financial crisis. The process was begun under Powell’s predecessor, Janet L. Yellen.

With the U.S. economy improving, Fed officials have signaled two more small hikes are expected this year to try to prevent a jump in inflation that can come when borrowing costs are low in a growing economy.

Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, said Trump can decide what to comment on and is not worried that the criticism will affect the central bank’s monetary policy.

“I have great confidence in Chair Powell and all of my colleagues on the Federal Open Market Committee that everyone is totally committed to our independence and making economic policy decisions based on the economic analysis and only on the economic analysis,” Kashkari said in an interview before Powell’s speech.

Economist Douglas Holtz-Eakin, president of the conservative-leaning American Action Forum think tank, said Trump’s criticism was inappropriate.

“We know that the Fed has a hard job. It has to be the bearer of bad news during good times and tighten in order to avoid sharp upticks in inflation,” he said. “It’s easier for them to do their job if they’re given independence and they don’t have people harping at them politically.”

Powell said the Fed was trying to balance two risks in its decisions on interest rates: “moving too fast and needlessly shortening the expansion, versus moving too slowly and risking a destabilizing overheating.”

“I see the current path of gradually raising interest rates as the FOMC’s approach to taking seriously both of these risks,” he said.

8:40 a.m.: This article was updated with additional details and comments from Federal Reserve Chairman Jerome H. Powell.

8:05 a.m.: This article was updated with additional details, background information and comments.

This article was originally published at 7:50 a.m.

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