Trump's barbs cast shadow over Federal Reserve meeting

[WASHINGTON] The US central bank opened its two-day policy meeting on Tuesday and, despite renewed attacks from President Donald Trump, is expected to announce the fourth interest rate increase of 2018.

While the Federal Reserve may feel pressure to demonstrate its independence from political influence by raising the benchmark lending rate in the face of Trump's barbs, there are legitimate concerns about the need for more Fed action amid signs the economy is slowing and no hint of runaway prices.

Mr Trump on Tuesday warned the Fed not to make "yet another mistake" by raising interest rates, the second consecutive day he has gone after the central bank on Twitter.

A growing number of economists share Mr Trump's basic argument - albeit in more diplomatic language - and have dramatically rolled back estimates for the number of increases in the benchmark lending rate they expect next year.

At first glance the United States seems to have a Goldilocks economy: unemployment is flirting with a 50-year low at 3.7 per cent, drawing people into the workforce who had been left on the sidelines; inflation is barely two per cent; and business confidence is very high.

But cracks have started to appear and elements fueling continued growth are fizzling out, while problems that had been ignored or overshadowed by good news are now garnering more attention.

Many economists now say the economy may have peaked, especially since the housing market has been trending downwards in recent months.

In addition, Mr Trump's trade wars, signs China's economy is slowing and the impact of Brexit on an already sluggish European Union add to the sense of global uncertainty that has led stock markets in recent weeks to sell off, wiping out all their gains for the year.

Economist Diane Swonk of Grant Thornton said "the Fed knows we are still in uncharted economic waters and doesn't want to risk overshooting on rates now that growth appears to be slowing."

UNDER PRESSURE

In fact, Fed Chairman Jerome Powell in recent statements has indicated the central bank is considering suspending its rate increases while it takes time to view more economic data.

Ms Swonk and other economists expect the policy-setting Federal Open Markets Committee to send a strong signal of that planned pause in its statement Wednesday, when it raises the policy rate another 0.25 percentage points.

The Fed has increased the key lending rate eight times since December 2015, bringing it up to 2.25 per cent after a long stretch at zero, but next year may make only one or two moves.

Mr Trump would rather the Fed stop now.

"I hope the people over at the Fed will read today's Wall Street Journal Editorial before they make yet another mistake," he tweeted.

The Journal editorial called for the Fed to ignore political pressure and "follow the signals that suggest a prudent pause."

Mr Trump has repeatedly broken with the norm respected by US presidents of recent decades who refrained from criticising the Fed.

He has called the central bank "crazy," "out of control" and a greater economic threat than China.

Democratic Senator Chris Coons rebuked Mr Trump for his attacks, calling them "completely inappropriate."

"You are jeopardising the credibility of the Fed, which is bad for markets and our economy," Mr Coons tweeted on Tuesday.

Analysts and former Fed members warn that Mr Trump's unprecedented vitriol could cause central bankers to try to prove their independence by raising rates even if they might otherwise have held off.

Economist Chris Low said that would be a mistake.

"True central bank independence is the freedom to do the right thing independent of the whims of the executive," Mr Low said, even if the right thing is what the president wants.

AFP