Trump escalates feud with Fed by picking political ally

It looks like a textbook example of political meddling with a central bank in an emerging market, except its happening in the US.

President Donald Trump on Friday said he is nominating former campaign adviser Stephen Moore to be a governor of the Federal Reserve — potentially putting a political loyalist in lockstep with Trump’s view on juicing the economy into the middle of Fed deliberations heading into the 2020 election.

Trump has gone from heckling Fed Chairman Jerome Powell on Twitter to trying to give one of his allies a hand on the levers of US monetary policy. That’s a shift by the president, who would previously opted for Republican establishment Fed picks including Powell, Vice Chairman Richard Clarida and Vice Chairman for Supervision Randal Quarles.

As a Fed governor, a position that requires Senate confirmation, Moore would be in a position to espouse his and the White Houses view that the economy can grow much faster without generating inflation.

“Skeptics in an out of the Fed still think sustained 3 per cent to 4 per cent growth is out of reach,” Moore, 59, co-wrote in a March 13 op-ed in the Wall Street Journal . “Nonsense.”

In a Bloomberg Television interview on Friday he called the Feds decision to hike rates in December a substantial mistake while saying that he did not want to be a disruptor and I want to be somebody who can really help Chairman Powell.

Moore’s selection is just the latest step in Trump’s effort to exert control over the US central bank, which was designed by Congress to be independent from short-term political pressure. After months of the President’s hectoring about interest-rate hikes, Powell in January put monetary policy on hold, then dined with him at the White House a few days later. On Wednesday, Powell went further, effectively taking rate hikes off the table in 2019.

Under the threat of constant second-guessing by the President, and potentially soon working with a Trump cheerleader inside the building, Fed officials may find it increasingly difficult to stay focused on keeping the institution at a distance from politics. That’s important because investors who purchase US Treasuries trust the Fed to ignore the wishes of politicians and do what it thinks is best for the economy in the long run.

Powell’s strategy so far is aimed at avoiding a downturn requiring rate cuts and the emergency bond purchases that drew bipartisan scorn a decade ago, even if it means some people think he caved to a politician.

In the eyes of the world, the Fed has turned quite political, said Guy Lebas, chief fixed income strategist at Janney Montgomery Scott, in Philadelphia. But I dont think anyone in the Eccles Building sits around and says the president wants this, lets deliver it, he said, referring to the Feds Washington headquarters. Fed spokeswoman Michelle Smith declined to comment.

Powell is already in a precarious spot with interest rates. The Feds policy rate is now set at 2.25 per cent to 2.5 per cent. During the last recession, the federal funds rate was cut about 5 per centage points. While that was an unusually deep contraction, 2.5 per centage points leaves little room to stimulate the economy out of a slump.

With rates at zero, the Fed might need to restart purchases of longer-term Treasury securities. For different reasons, quantitative easing was unpopular with both Republicans or Democrats. In 2011 Moore attacked the second phase of the Feds QE programme.

QE2 is just a fancy word for saying that what were doing right now is were monetizing our debt, he told a November 2011 conference in Palm Beach, Florida, according to a transcript of the event. And so this is, I think, one of the scariest things. More recently, he is accused the Fed of fomenting deflation rather than inflation, saying Powell was a bad choice for chairman.

The people on the Federal Reserve Board should be thrown out for economic malpractice, Moore said Dec. 22 on Red Apple Group chairman and chief executive John Catsimatidiss radio show, blaming an end-of-the-year stock market swoon on the Feds rate hikes.

Although Trump picked Powell to lead the Fed, starting in February 2018, it didnt take long for him to regret his decision. The president began expressing his displeasure with Fed rate hiking and Powell last summer after rates were raised in June.

The criticism peaked in December when, in a tweet, he called the Fed the only problem facing the economy. In one memorable line, he asked monetary policy makers to feel the market. At one stage, Trump discussed firing Powell, Bloomberg News reported December 21.

Under fire from Trump, Powell has tried to communicate directly to a broader audience of Americans, appearing on the CBS News programme 60 Minutes and doing town-hall discussions in an effort to demystify what his institution does. He is also pledged to wear the carpets of Capital Hill out in an effort to explain the Fed to US lawmakers. Powell and Trump share the goal of a healthy economy.

My colleagues and I have one overarching goal: to sustain the economic expansion, with a strong job market and stable prices for the benefit of the American people, Powell said at the opening of his press conference Wednesday, explaining the decision.

The words reflect Powell’s awareness of the environment the Fed finds itself in. Fighting a recession with limited tools would be one of the worst things for Fed amid one of the biggest threats ever to its independence.

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