The Fed's independence from the executive branch is deeply ingrained in the institution, even though the president gets to appoint people to the Fed's Board of Governors. That long-standing independence is a welcome source of institutional strength.
Take a moment this week to give thanks for transparency.
Owing to the reams of information and forecasts that the Federal Reserve now publishes, it’s pretty easy to discern the path interest rates are on. That means that when the Fed considers a pause in raising interest rates early next year, we’ll know it is not because of President Donald Trump’s efforts to bully the world’s most powerful central bank. Even before the president’s burst of criticism last month about rising rates, even before he renewed his attack the past few days, the Fed’s public statements have told us that a breather is coming.
In short: Ignore Trump; look at what the Fed says and does. We’ll get an update from Chairman Jerome Powell late this week when he addresses the Fed retreat in Jackson Hole, Wyoming.
Trump has moaned to donors that Powell didn’t turn out to be the cheap-money Fed guy he wanted. The president repeated the effort this week in an interview with Reuters, adding the ridiculous claim that the euro is manipulated and the more credible notion that China is massaging the yuan. (The European Central Bank rarely intervenes directly in currency markets; when the ECB does, it’s usually with the Fed.)
The irony of Trump’s bleating is that after a couple of years of gentle rate hikes, the Fed will soon approach a point where it takes a breather and looks around. Trump is irrelevant to this.
Every quarter, the Federal Open Market Committee releases a summary of economic projections, known in central bank parlance as the SEP. Along with numbers on unemployment, gross domestic product and the pace of price increases, it includes a best guess on where the benchmark interest rate is headed. June’s SEP, the most recent, says that 2.9 percent is the federal funds rate level that’s most sustainable over the long run.
Think of that long-run rate as a kind of proxy for neutral, a rate of interest that neither stimulates nor restricts the economy. After June’s quarter-point increase, the fed funds rate is in a range of 1.75 percent to 2 percent. Add another quarter point in both September and December, and you get to between 2.25 percent and 2.5 percent. Not far from 2.9 percent.
That’s why Fed watchers think that in March or June, Powell will be off autopilot and policy will be more discretionary. A lot of the accommodation that can be traced to the Great Recession will have been removed. Rates will be based more on what the current and future course of the economy look like. Policy will be more driven by current conditions and less about easily predictable step-by-step cleanups of the past. It will also be trickier.
The Fed’s independence from the executive branch is deeply ingrained in the institution, even though the president gets to appoint people to the Fed’s Board of Governors.
That long-standing independence is a welcome source of institutional strength. The modern Fed’s flood of public information is exactly what’s needed now. The SEP, the “dot plots” and the forward guidance get some criticism from market players for making life too predictable. For now, that predictability helps insulate the Fed from Trump.