WASHINGTON — A former top Federal Reserve official implied that the central bank should consider allowing President Trump’s trade war to hurt his 2020 election chances, an assertion that drew a firestorm of criticism and a rare pushback from the Fed itself.
William Dudley, the former president of the Federal Reserve Bank of New York and now a research scholar at Princeton University, said in a Bloomberg Opinion piece that “Trump’s re-election arguably presents a threat to the U.S. and global economy.” Mr. Dudley added that “if the goal of monetary policy is to achieve the best long-term economic outcome, then Fed officials should consider how their decisions will affect the political outcome in 2020.”
It is a controversial statement, particularly coming from an official who ranked among the Fed’s most powerful policymakers as recently as 2018. It also comes at a sensitive moment for the Fed, which has been under attack from Mr. Trump and trying to assert its independence from the White House and politics in general.
“The Federal Reserve’s policy decisions are guided solely by its congressional mandate to maintain price stability and maximum employment,” Michelle Smith, a Fed spokeswoman, said when asked about the column. “Political considerations play absolutely no role.”
Mr. Trump has waged a yearlong campaign to pressure the Fed to cut rates, accusing the central bank of hurting the economy by keeping rates too high and putting the United States at a disadvantage to other nations, like China and Germany.
“The Federal Reserve loves watching our manufacturers struggle with their exports to the benefit of other parts of the world,” Mr. Trump said in a tweet on Tuesday. “Has anyone looked at what almost all other countries are doing to take advantage of the good old USA? Our Fed has been calling it wrong for too long!”
The attacks have put the Fed on the defensive, prompting top officials including Jerome H. Powell, the Fed chair, to insist that the central bank sets policy to achieve economic goals without taking politics into account.
The Fed cut rates for the first time in more than a decade in July and has kept the door open to future cuts, with Mr. Powell saying the central bank is prepared to act to protect the economy against slowing global growth and as Mr. Trump’s trade fights stoke uncertainty.
Mr. Dudley essentially said the Fed should wade into politics, arguing that the central bank should consider the political ramifications of the policy decisions it makes. By lowering interest rates to offset economic harm caused by Mr. Trump’s trade war with China, Mr. Dudley said the central bank could give the White House room to ramp up trade tensions.
“The central bank’s efforts to cushion the blow might not be merely ineffectual,” he wrote. “They might actually make things worse.”
Fed watchers responded to Mr. Dudley’s piece with widespread concern, asserting that it could feed conspiracy theories that the central bank is trying to influence political outcomes.
“The Fed for decades has scrupulously avoided doing that, and has tried to avoid giving that perception,” said Adam Posen, the president of the Peterson Institute for International Economics. “And this isn’t some ‘deep state’ fake: They genuinely don’t want to get into it, because ultimately they are accountable to Congress.”
Mr. Trump announced an escalation of the trade war with China just a day after the Fed cut rates in July, and the concern that Fed policy is enabling the tariffs is often repeated by analysts. Michael Strain at the American Enterprise Institute said it was a valid point to raise and consider.
But Mr. Strain pushed back against the idea that the Fed’s policymakers should try to guide political outcomes.
“It’s wildly irresponsible,” he said. “The Fed is not elected; it is appointed. It has a responsibility to adhere to a narrow reading of its mandate.”
The central bank’s leadership consists of 12 regional presidents, who are selected by businesspeople and community leaders from their districts and who share four annually rotating votes on interest rates. The New York Fed president is the most powerful regional leader and has a constant vote on policy.
The rate-setting committee also includes seven governors who are nominated by the president and confirmed by the Senate. Only five of those positions are currently filled, although Mr. Trump has said he intends to nominate another two members to the Fed.
The Fed does not answer to the White House by design: It is removed from politics so that it will make better long-term decisions for the economy, rather than trying to goose the economy going into election years. It is, however, responsible to Congress, which can change the rules that govern it.
That insulation has, historically, helped to fuel criticism that the Fed is removed from the public and in the pocket of bankers. The central bank has long been the target of conspiracy theories, and popular books about it have borne titles like “Secrets of the Temple.”
More recently, the president has placed the central bank firmly in political cross hairs. In a Twitter post last week, he asked whether Mr. Powell or President Xi Jinping of China was a “bigger enemy” of the United States. Mr. Trump has reportedly considered firing or demoting Mr. Powell in the past, and he recently told reporters that he would accept Mr. Powell’s resignation if it were offered.
Despite that pressure campaign, Fed officials have repeatedly pushed back against the idea that they would in any way take the White House’s comments or potential actions into account when setting policy.
“We’re never going to take political considerations into account or discuss them as part of our work,” Mr. Powell said at a news conference in January. “We’re human. We make mistakes. But we’re not going to make mistakes of character or integrity.”
President Trump on Monday called for the Federal Reserve to cut its benchmark interest rate by 1 percentage point, a move that would typically be considered only when the U.S. economy is on the brink of a recession, and again criticized his own central bank chairman for a “horrendous lack of vision.”
In a pair of tweets Monday morning, the latest in a series of attacks Mr. Trump has levied against Fed Chairman Jerome Powell, the president said a combination of a reduced interest rate and a resumption of the Fed’s crisis-era bond-buying stimulus would improve the economy both in the U.S. and globally. “Good for everyone!” Mr. Trump tweeted.
Mr. Trump, who returned Sunday from a 10-day vacation at his golf course in Bedminster, N.J., has repeatedly attacked Mr. Powell for the state of the economy, even as he and his advisers have projected optimism that the decadelong economic expansion will continue. Mr. Trump has repeatedly called on the central bank to lower interest rates more than it has, saying that would further boost growth. U.S. economic growth slowed to 2.1% in the second quarter from 3.1% in the first three months of the year.
Last Wednesday, on a day when the Dow Jones Industrial Average slumped 800.49 points, or 3%, the president spent much of the day attacking the Fed chairman on Twitter.
White House and campaign aides acknowledge privately that a recession would threaten Mr. Trump’s 2020 re-election campaign, which has made a booming economy a central selling point. On Tuesday, the White House has arranged a call in which National Economic Council Director Larry Kudlow is expected to reassure state and local officials about the state of the economy.
Asked in an interview on Fox News about possible economic alarm bells, White House counselor Kellyanne Conway on Monday played down the chance of a slowdown.
“It’s nice to have the mainstream media finally covering the economy, but they only cover it when they can use Sesame [Street’s] Grover word of the day, ‘recession,’ ” she said. Pointing to strong employment numbers, she said the economy’s “fundamentals are very strong.”
The last time the Fed reduced rates by a full percentage point was during the 2008 financial crisis.
President Trump is blaming the Federal Reserve for holding back the economy and stock market, despite the Fed’s decision to do two things he wanted: halt rate increases and stop shrinking its asset portfolio. According to a person who directly heard Mr. Trump’s comments at a meeting, the president recalled a recent phone conversation with Fed Chairman Jerome Powell. “I guess I’m stuck with you,” the president recalled telling Mr. Powell. Mr. Trump has blasted the Fed and Mr. Powell at three meetings in the past week alone.
From reporter Nick Timiraos:
Fed officials have been puzzled by surprisingly muted inflation pressures in recent months, which—together with worries about growth in Europe and China, and increased market volatility late last year—justified their interest-rate pause in the first quarter. One challenge for Mr. Powell that his recent predecessors didn’t face: President Trump’s acerbic criticism—by pre-emptively blaming the central bank for any wobbliness in the economy—could magnify any misstep. Even though Fed officials promise they are tuning out politics, every comment by Mr. Trump will inevitably filter the Fed’s policy decisions through a political lens in the eyes of at least some market participants.
President Trump has unabashedly hitched his political fortunes to a rising stock market. Now, with stock prices in retreat, he has become increasingly fixated on the idea that one man is to blame for the recent rout: Jerome H. Powell, chairman of the Federal Reserve.
After the Fed raised its benchmark interest rate on Wednesday, the fifth consecutive quarterly increase, Mr. Trump fretted to aides that Mr. Powell would “turn me into Hoover,” a reference to the man who was president in the early years of the Great Depression.
Mr. Trump has said choosing Mr. Powell for the Fed job last year was the worst mistake of his presidency, and he has asked aides whether he has the power to fire him.
But the volatile stock market, which just posted its worst week since 2008, is falling in part because of Mr. Trump’s own policies, including
- an escalating trade war with China,
- a shutdown of the federal government and
- the fading effects of the $1.5 trillion tax cut Mr. Trump ushered in at the end of 2017.
While the Fed’s rate increases have upset investors — who seem to have a darker view of economic growth than the central bank does — some analysts said Mr. Trump’s musings about the Fed would only exacerbate anxieties.
“If Powell gets terminated, what we’ve seen happen in the markets in the past few weeks will look like a walk in the park,” David Rosenberg, chief economist at Gluskin Sheff, said in an email on Sunday. “The dollar will go into a tailspin, and even confidence in the Treasury market will erode, especially among foreign creditors.”
Mr. Trump’s economic advisers scrambled over the weekend to reassure markets that Mr. Trump was not, in fact, planning to fire Mr. Powell. Treasury Secretary Steven Mnuchin tweeted what he said was a quote from Mr. Trump accepting that he did not even have the power to do so.
Mick Mulvaney, the incoming acting White House chief of staff, implied on Sunday that Mr. Trump had, in fact, inquired about removing Mr. Powell, saying on ABC’s “This Week” that the president “now realizes he does not have the authority.” But Mr. Mulvaney added that he had heard this from Mr. Mnuchin, not from Mr. Trump.
.. Mr. Mnuchin has worked in recent days to obtain Mr. Trump’s assurance that he would not remove Mr. Powell, according to an administration official who spoke on condition of anonymity. But that person cautioned that Mr. Trump could change his mind. The person noted Mr. Trump has a tendency to nurse grudges even when he temporarily sets a subject aside.
.. Some economists argue the Fed should continue its stimulus campaign to drive up employment and wages. They note that the Fed is about to undershoot its 2 percent inflation target for the seventh consecutive year, suggesting there is no need to step on the brakes.
.. In fact, during his presidential campaign, Mr. Trump accused the Fed of getting political, saying that the bank’s chairwoman at the time, Janet L. Yellen, should be “ashamed” for keeping interest rates low — a move he said was meant to help President Barack Obama.But it is far from clear such a decision would serve the president’s purpose. A replacement for Mr. Powell would require Senate confirmation, and this person would join a policymaking committee that voted unanimously for the December rate increase. That committee also might be inclined, on future rate decisions, to demonstrate its independence from the president.
.. Mr. Trump also chose three of the other four members of the Fed’s board, all of whom joined Mr. Powell in voting for all four 2018 rate increases.In conversations with friends and advisers, Mr. Trump has acknowledged responsibility for the selection of Mr. Powell. He told Stephen Moore, an economist at the Heritage Foundation, that it was “one of the worst choices I’ve ever made,” according to Mr. Moore.Some of Mr. Trump’s economic advisers have encouraged him to remove Mr. Powell, arguing that the decision would reverse recent stock declines.
Sarah Binder, a professor of political science at George Washington University, said presidents had often tried to shape Fed policy, but the current episode stood apart because Mr. Trump appeared to be acting against his own interest in a stable economy.
“I think what is the unusual part here is that it seems the president has created the crisis,” she said. “His intervention certainly seems to be making things worse for him and worse for the Fed and worse for the economy. It’s just very shortsighted, and we’re not used to that.”