Wednesday’s Federal Reserve decision to raise interest rates was largely a nonevent, given how thoroughly markets had expected it. Nonetheless, it offered a comforting reminder that Fed officials know how to do their job – which these days means ignoring public statements from the chief executive and focusing on the economy.
For decades, U.S. presidents have refrained from criticizing the central bank in public, allowing it to go about its duty of maintaining stable prices and maximum employment in relative peace. Not so President Trump. In recent months, he has repeatedly expressed his dissatisfaction with the Fed’s monetary policy, saying that he would prefer an easier-money approach. “I’m not thrilled,” he said in August.
On Wednesday, at their first policymaking meeting since the president’s latest comments, Fed officials demonstrated yet again that they will be guided by economic data, which overwhelmingly indicate that the central bank needs to remove stimulus by boosting interest rates. Unemployment is well below what economists see as its natural level, the Fed’s preferred measure of inflation has reached its 2 percent target, and the government is running a budget deficit expected to top $1 trillion in 2019.
“We consider the best thinking, the best theory and the best evidence,” Chairman Jerome Powell said after the decision to raise rates, in response to a question about Trump’s comments. “We don’t consider political factors.”
Congress granted the Fed a measure of independence for good reason: To do what’s right for the economy, it needs to be insulated from the whims of politicians concerned about the next election. Lawmakers set the central bank’s goals, then leave it to pursue them as it sees fit.
Research and experience have demonstrated that this arrangement works well – it’s what, for example, allowed then-Chairman Paul Volcker to defeat the runaway inflation of the late 1970s. No wonder most of the world’s largest economies have adopted similar approaches.
Granted, the president’s discontent could be a threat if it prompts Congress to place new constraints on the Fed. Powell recognizes the danger, and has made a point of meeting with legislators and administration officials to head it off. If the rhetoric emanating from the White House persists, it might eventually make sense for Powell to appeal directly to the American people, explaining in accessible terms why an independent central bank is so important.
In deciding what to do with interest rates, though, the Fed is acting exactly as it should, providing much-needed competence and consistency at a time when those qualities seem in short supply.
Send questions/comments to the editors.
