One of Donald Trump’s top economic advisers says the president is not trying to improperly influence the U.S. central bank.
The director of the National Economic Council, Larry Kudlow, spoke to the television network CNBC a day after Trump said the U.S. Federal Reserve is “loco” (crazy) for raising interest rates. On Thursday, Trump continued his attacks on the central bank, calling the Fed “out of control,” but denied he has plans to fire Fed Chair Jay Powell.
Kudlow said, “We all know the Fed is independent. The president is not dictating policy to the Fed.”
The Federal Reserve slashed the benchmark interest rate nearly to zero in an emergency, temporary effort to boost economic growth hurt by a severe recession 10 years ago. Since then, the economy has stopped shrinking and resumed growth, unemployment has fallen to historic lows, and wages and inflation have begun to rise modestly.
Low interest rates boost growth by making it cheaper for businesses and families to borrow money to build factories or buy homes. Economists warn that keeping interest rates too low for too long could spark strong inflation that pushes up prices and wages so sharply that they damage the economy.
To fend off inflation, the Fed has been slowly raising rates a quarter of a percentage point at a time. They are expected to continue this effort to gradually return rates to their historic averages.
A common conflict grows out of the fact that incumbent elected politicians get the blame if the economy is not growing strongly. That gives presidents and others a political incentive to keep interest rates low, regardless of the consequences.
That is why central banks in the United States and elsewhere are often set up to insulate them from political pressure so they can make decisions on their economic merit rather than potential popularity.
When the independence of a central bank is seriously questioned, markets and currencies can fall because investors lose confidence in the economic management of a nation.
U.S. stock markets fell sharply Wednesday amid worries about rising interest rates, growing tensions over trade and other issues. Some Asian and European markets took losses Thursday. In Thursday’s U.S. trading, some key markets stabilized, and one recovered some ground.