How should the Fed respond to Trump’s comments?

The president tempered his criticism by saying that Chairman Jerome Powell — his own appointee — is a “very good man.” He also stopped short of directly calling on the Fed to stop raising interest rates.

“I’m not thrilled,” he said. “Because we go up and every time you go up they want to raise rates again. I don’t really — I am not happy about it. But at the same time, I’m letting them do what they feel is best.”

Here is the story.

It is probably best for the Fed to simply pretend he did not say this.  Trying to respond simply escalates the dispute and risks a repeat comment.  That said, the Fed may make its future plans concerning interest rates hazier, thereby offering less forward guidance.  That will give Trump less of a target in the short run, and furthermore “the market,” with fuzzier expectations to begin with, won’t be able to estimate whether the Fed was swayed by Trump or not.

In any case, the end result will be a modest increase in economic uncertainty.

I would stress, however, that we do not have a politically independent Fed to begin with.  Such an arrangement is impossible in a democracy, given that current institutional protections for the Fed always can be taken away by Congress and the president.  What we do have is bounds for independence, and those bounds just narrowed, and not for the better.  If I were going to narrow the political independence of the Fed (and I am not advocating this), interest rates are not even the correct variable to choose.  Why not some measure of how much the Fed is aiding the economy in a downturn?  Interest rates may or may not be the most powerful tool there.

The White House itself is trying to pretend the event didn’t happen:

Shortly afterward, the White House issued a statement saying Trump’s comments were merely a “reiteration” of his “long-held positions,” and that his “views on interest rates are well known.”

“Of course the President respects the independence of the Fed,” it said. “He is not interfering with Fed policy decisions.“

And here is another recent remark by Trump, or was it?