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US Fed in Trump's line of fire but unlikely to change course

Heather SCOTT
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US President Donald Trump, pictured here in the Oval Office October 10, 2018, has dispatched his top diplomat to Saudi Arabia to speak to the king about missing journalist Jamal Khashoggi

US President Donald Trump, pictured here in the Oval Office October 10, 2018, has dispatched his top diplomat to Saudi Arabia to speak to the king about missing journalist Jamal Khashoggi (AFP Photo/SAUL LOEB)

Washington (AFP) - The US central bank once again is on the firing line following President Donald Trump's unprecedented attacks but is likely to shrug it off and focus on economic data.

Trump doubled down on his attacks on the Federal Reserve Thursday, saying they were "making a big mistake" and were "out of control" in raising interest rates.

That was after saying the Fed had "gone loco," using the Spanish term for "crazy," and blaming the independent institution -- normally off limits in public criticism -- for the sharp downturn in global stock markets Wednesday.

"It is a correction that I think it is caused by the Federal Reserve with interest rates," Trump told reporters at the White House. "I think the Fed is out of control."

The breach of norms is not surprising for a real-estate-developer and reality-star-turned-president who has cheered as Wall Street has soared to new heights this year, hitting repeated records, and used that as proof his economic policies were working.

But the Fed has repeatedly explained the justification behind the three interest rate increases this year, and Trump's own policies are contributing to the case for the moves, including steep tax cuts, increased deficit spending, and the trade conflict with China.

"I think a lot of presidents have been frustrated by the Fed, they just in recent years haven't said so in public," David Wessel of the Washington-based Brookings Institution told AFP.

The central bank had raised the benchmark lending rate, which affects everything from mortgages to car loans to bond yields, just twice before Trump took office in January 2017, after a campaign in which he criticized the institution for allegedly keeping rates near zero in a bid to help his opponent.

- Not if, but how much -

But as the economy began to post solid and consistent growth following the global financial crisis of 2008, and prices began to creep higher, the central bank was anxious to return to a more normal policy.

With inflation barely above two percent and unemployment at the lowest in a generation, the Fed is expected to tighten once more this year, and three or four times in 2019.

In fact, "interest rates are very low given how strong the economy is, given where inflation is and given where unemployment is," Wessel said. "The real question is not whether the Fed should be raising the interest rates from where they are now, but how far and how fast should they raise interest rates."

The December tax cuts that Trump championed, as well as the increased federal spending in this year's budget, are expected to do what the president intended by juicing the economy -- but when unemployment was already low and the economy growing at a good rate.

That makes it even more important for the Fed to be watchful for inflation.

Former Treasury Secretary Larry Summers said the economy was on a "sugar high" that had been fueling stock prices.

Trump is correct in saying that rising interest rates tend to strengthen the US dollar, as investors return funds to the United States in search of higher returns and safer investments.

Higher interest rates likewise make bonds more attractive than riskier equities, and the 10-year Treasury bond yield has jumped above three percent this week.

The tariffs Trump imposed on China and other trading partners on key goods like steel and aluminum, and Beijing's retaliation against US products, have raised prices for American companies, which is expected to start to hurt corporate profits and could dampen investment as well.

Still, Trump said of Fed Chairman Jerome Powell, "I'm not going to fire him."

Fed named Powell to lead the central bank but can only fire him for cause.

Summers cautioned Trump against criticizing the Fed, saying it might have the opposite effect.

"The key issue is that when the president of the United States blatantly politicizes the Fed, he makes it much harder for the Fed," Summers said on CNBC.

"No responsible central bank wants to look like it's bending to political pressure and it will damage its reputation and credibility if there's an appearance of bending to pressure."

In the face of the repeated attacks, Powell said central bankers did not pay attention and are "quite removed from the political process."

"And we just try to do the right thing for the medium and longer term for the country," said Powell.

The right thing includes doing "whatever it takes" to keep inflation from accelerating, Powell said.