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Longtime Fed official explains why Chair Powell should ignore Trump

President Trump has attacked Jerome Powell again, slamming the Federal Reserve Chair in a Washington Post interview this week. The remarks are the latest in a long list of attacks starting in July of last year when the president critiqued the Fed’s decisions to raise interest rates.

According to former Fed official Vincent Reinhart, now chief economist for Standish Mellon Asset Management, the White House is increasing two levels of pressure on the Fed: public and private.

“The public one,” Reinhart said, “it usually backfires.”

“Indeed, do you want to be the person on the committee criticizing your Chair — or disagreeing with your Chair when it sounds like you’re, therefore, by default agreeing with the president? So you know, generally this is Chair Powell’s chance to establish his independence and credibility by just ignoring what the president says.”

But private, backchannel influence, Reinhart argues, is “historically more effective.”

“That would be conversations over breakfast when the Secretary of the Treasury and the Fed Chair meet usually once a week — or phone calls from the White House to the governors that they appointed or threats about future governor appointments. That doesn’t seem to be the way this White House works.”

Federal Reserve Board Chairman Jerome Powell speaks at the Economic Club of New York, Wednesday, Nov. 28, 2018, in New York. (AP Photo/Mark Lennihan)

“If it’s just public pressure, Chair Powell will be able to deal with.”

In remarks Wednesday to the Economic Club of New York, Powell said he sees current interest rates “just below” neutral. The statement follows more than a month of market turmoil after Powell commented that the central bank was “a long way” from reaching neutral for interest rates.

Stocks jumped after the his remarks. One more rate hike is expected in December, with an additional three or four hikes predicted for next year.

“I think as the Fed tightens some more, they will be flattening the yield curve,” Reinhart said.

“They may even get to the point where they invert the yield curve. In our forecast, we think the Fed is on track to tighten one quarter point every quarter starting in the meeting later next month and then three more times in 2019 that inflation does pick up a little bit,” Reinhart said on Tuesday’s Midday Movers.

“So longer-term yields back up. Be thinking about a 10-year Treasury yield in the neighborhood of 3.5% by next year and a policy rate of 3.25%. That’s a pretty flat yield curve.”

Kristin Myers is a reporter at Yahoo Finance. Follow her on Twitter.

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