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Is the Federal Reserve about to cave to Trump's demand to cut interest rates?

Don Lee, Los Angeles Times on

Published in Political News

WASHINGTON -- President Donald Trump has been hectoring the Federal Reserve to lower interest rates, and financial markets are screaming for a cut. This even though rates are historically low and the economy is sailing along, albeit with some recent gray clouds.

What's a central bank to do?

Fed policymakers are expected to stand pat on rates after their two-day meeting Wednesday. But it looks as if they already may have backed themselves into a corner.

In recent weeks the Fed and its chairman, Jerome Powell, have signaled they're prepared to lower rates if the outlook worsens. Just three months ago they were favoring a rate hike or no action.

Failure now to cut rates -- or a pivot back to a rate hike or even a neutral stance -- could cause a violent sell-off by markets.

But neither does the Fed want to be bossed around by markets, nor seen as doing the president's bidding, which could hurt its credibility and weaken the independence the Fed has long fought to preserve.

 

"If they do cut (rates), they will be accused of caving to Trump," said Alan Blinder, a Princeton professor and former Fed vice chair in the mid-1990s. "(Trump) will of course claim victory. He will say: 'The dumb Fed finally learned to listen to me.' "

The Fed shift to a rate-cut bias comes at a particularly sensitive time. Trump wants to pump up growth ahead of the 2020 election and cushion the economic damage from his escalating trade war with China.

At less than 2.5%, the Fed's main benchmark rate remains low by historical standards, meaning that any cuts at this point would further limit the central bank's ability to fight a recession when it strikes.

Trump has been relentless in excoriating the Fed and demanding that it reverse rate hikes made last year.

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