The Last Apolitical Institution in Washington

President Trump keeps criticizing the Federal Reserve. The central bank keeps ignoring him.

Carlos Barria / Reuters

This week, President Donald Trump took aim at the Federal Reserve. Again. “The Fed is going wild. I mean, I don’t know what their problem is, but they’re raising interest rates and it’s ridiculous,” he said after the markets posted steep and sudden drops. “The Fed is going loco, and there’s no reason for them to do it.”

The president was gesturing to the fact that the Federal Reserve has tightened monetary policy by raising interest rates three times this year, as was widely expected given a low unemployment rate and steady growth. The central bank appeared to be raising rates so it could cut them again when the economy softens, Trump argued: “It is a lot of safety, and it gives you a lot of margin.” But it might be forcing the markets and perhaps the whole economy into a correction, he implied.

It is all a bit rich coming from the guy running an unrestrained campaign of pro-cyclical stimulus, pouring gas on a hot fire, in economic terms, and racking up trillion-dollar deficits while doing so. And it is all a bit worrisome given the value of a truly independent central bank. But in some strange way, Trump’s criticism of the central bank has underscored its independence, rather than undercut it. With the courts a partisan battleground, polarization increasing, and the Trump administration remaking the government, the Fed just might be the last apolitical agency in Washington.

In the past year, Trump has criticized the central bank repeatedly. “I don’t like all of this work that we’re putting into the economy and then I see rates going up,” he said in July, to all sorts of tut-tutting from international economic types. “I have to tell you, it puts us at a disadvantage.” The substance of Trump’s critique was no surprise: Low rates mean more growth. Nor was the fact that he made it. As a candidate, Trump had argued that Janet Yellen, then the Fed chair, was goosing markets to benefit Barack Obama, then the president. But the commentary was nevertheless unprecedented. Residents of the White House have scrupulously avoided calling the Federal Reserve’s independence into question since the Richard Nixon administration.

With good reason. Markets tend to punish countries with politically motivated monetary authorities, and politically motivated monetary authorities seem to produce worse economic outcomes. “Operational independence of central banks—the ability to choose an instrument to achieve inflation goals—has been associated with significant improvements in price stability,” one Harvard review of the research reads. If Trump had his way, the Fed might keep interest rates too low for too long, fomenting bubbles or generating excess inflation.

But Trump’s talk, unusual as it is, does not seem to have translated into action. The current Federal Reserve chairman, Jerome Powell, a Trump appointee, is widely respected and has maintained the course set by Yellen before him. “We have disparate points of view, which we debate extensively,” Powell said at a press conference in September, when asked about Trump’s criticism. “We don’t consider political factors.”

People outside the building believe him. “Powell just seems to be a straight shooter, independent minded, respected by both sides of the aisle,” said James Kahn, an economist and a former official at the Federal Reserve Bank of New York. “The only way Trump could end up changing that is if there were openings on the board and Trump could get through” more political nominees. Yet that has not happened. Indeed, Trump just named a highly lauded Democrat to an open posting.

Even if Trump names more politically minded candidates to open positions, the institution is simply not as easy to sway as departments run by the Cabinet or independent bodies stocked with nominated officials and political staffers. The Fed is a cloistered, small-c conservative bureaucracy. Its governors have long, staggered terms. The tenure of its chairs does not align with the four-year presidential cycle.

Trump has not seemed interested in pressuring the Fed behind closed doors, either. “Historically, it’s the inside pressure that’s tougher to deal with,” said Vincent Reinhart, the chief economist at Standish Mellon, who worked at the Fed for two decades. “Traditionally, the chair has a breakfast once a week with the secretary of Treasury. When they start leaning into you, saying you’re making a mistake in private, that’s harder.” But Treasury Secretary Steven Mnuchin has undercut Trump’s criticism of the bank. And “President Trump shows no appetite to play the inside game,” Reinhart told me.

What Trump does seem to be interested in is setting the Fed up as a scapegoat—something to blame when the economy softens, as it inevitably will. “Having an independent agency is useful because it provides a layer of insulation for politicians, too,” Reinhart said. “Of course, President Trump would prefer low rates, but what he’s really doing is putting a marker down so he can say, ‘I told Jay Powell he better be careful!’ and that will be useful in 2019 or 2020 when the economy slows.”

If anything, the president’s criticism seems likely to lead to higher rates, rather than lower ones, if the Fed feels it needs to prove its insulation from the rest of Washington. Larry Summers, a former Treasury secretary, made that argument recently, writing that it is “part of the reason why wise Presidents respect Fed independence.” The JPMorgan economist Michael Feroli said much the same in a note to clients. “If a decision is a close call, then the appearance of kowtowing to the President may bias them toward raising rates.”

But the likeliest outcome is that Trump keeps up with the sound and fury. And the bank continues not to listen.