Name calling and market pressure may curb U.S. Fed's independence: Don Pittis

With last week's declaration that the very smart people at the Federal Reserve are "boneheads," U.S. President Donald Trump has becomeperhaps the world's highest profile prognosticatorof a North American crisis.

The irony of the insult notwithstanding, Trump's demands that the "Federal Reserve should get our interest rates down to ZERO or less" seem to indicate the president thinks a weakening U.S. economy needs powerful medicine.

As Federal Reserve chair Jerome Powell and his team of advisers make their rate decision this week it is hard to be sure whether, or how much, a decision to cut rates will be influenced by outside pressure.

On purely economic grounds, the Fed may see reasons to leave rates unchanged. But despite their official independence, political directivesand market expectations are telling the Federal Open MarketCommittee, who make the final rate decision, that their hands are tied.

According to most economists, low and negative interest rates of the kind Trump advisedare a special tool reserved for dire circumstances.

When central banks slashed ratesin the aftermath of the 2007-08 credit crunch theywere widely applauded. But theidea that something similar is happening nowwould be terrifying. That is, if we believed it.

Puzzling out the true meaning of thepresident's tweets is never easy. Perhaps it is a madcap idea tosatisfy his base. Orit's just another way of feathering his own nest, a standard Democratic complaint.

Certainly low rates help property companies with large loans and tend to help rich people with assets such as real estate and stock.

The level-headed folks at the FOMCwill know that whatever rationalarguments there may befor rate cuts, there are many, many reasons to wait as data pours in showing the economy is nowhere near collapse and recession.

The singlebiggest fear for the U.S. economy has been its trade war with China, and last week there was clear evidence that both sides are taking steps back from the brink.

Firing national security adviserJohn Bolton, seen as the Trump administration's most hawkish hawk, may offer economic dividends and draws the U.S. back from economically destabilizing regional conflicts.

Inflation is not dead

"In the world's hot spots from Iran to North Korea and even among allies some see opportunity in President Donald Trump's firing of his national security adviser,"reportedAssociated Press last week.Of course all bets are off following the weekend attacks on Saudi oil production that some U.S. officials have blamed on Iran, something that country has denied.

Perhaps most significant for the Fed,whose two prime mandatesare to boost employment and keep inflation under control, were numbers last week showing inflation is not dead after all.

While the headline price level was up only slightly, core inflation, the measurechopping outvolatile goods such as energy, was well above target at 2.4 per cent, and higher than market expectations.Gas prices that have been holding inflation down may be set to soar following the Saturday attack, which is expected to cause amajor drop in Saudioil output.

The surge is a warning and a reminderthat at some point the Fed will againhave to raise rates. Surely FOMC members will not forget the theatrical wailing from markets last time the Fed felt forced to hike rates to fight inflation. Perhaps the memory will give themsecond thoughts about making cuts that mighthave to be reversed.

The other strong technical argument for refusing to cut rates frivolously is that the bank is wasting fire power for when a recession actually hits. If Powell follows Trump's advice and cuts when the U.S. economy is strong, the FOMC must show what tools they will useonce it is not.

In a time when politicians seem willing to say anything to get what they want, perhaps most important is Powell's stature as someone who can be trusted to reach conclusions based strictly on evidence.

Speaking in a British context, last week Canadian author Margaret Atwood described a growing medievalism where politicians who disagree with their mad king fear they will be next on the chopping block.

Being subject to Congress, not the administration,means that Powell has the freedom to contradict Trump and declare that the U.S. economy is vibrant and strong. Inwhat Princeton economist Robert Shillerhas described as"narrative economics,"Powell may havethe power to shift the narrative.

If he agrees with Trump and others who claim a weakened United States needs rate cuts, consumers and businesses are more likely to believe him than Trump, whose interests are opaque.

But if Powell can honestly tell investors and consumers that a strong U.S. is not showing signs of recession and does not need lower interest rates, that a young and vigorous workforce hired byinnovative companies still has room to grow, investand prosper,hemay be able to boost the North Americaneconomy far more than he could with a quarter or even a half percentage point cut in rates.

Follow Don on Twitter @don_pittis