Trump fight with Fed blows over

Trump fight with Fed blows over
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President TrumpDonald John TrumpGillibrand backs federal classification of third gender: report Former Carter pollster, Bannon ally Patrick Caddell dies at 68 Heather Nauert withdraws her name from consideration for UN Ambassador job MORE's months-long feud with the Federal Reserve is cooling off as central bank officials indicate a pause in interest rate hikes.

Various Fed officials this week have said they're reluctant to move forward with raising borrowing costs while inflation remains low and the economy continues to add jobs.

The bank's policymakers are expected to hike rates twice this year, down from four times in 2018, but some of the Fed's most hawkish members have moved away from that projection in recent remarks.

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Trump has repeatedly hit the Fed and its chairman, Jerome Powell, since July for raising rates. The president has said the central bank poses "the biggest threat" to the economy and blamed it for triggering a December stock sell-off that was the worst since the Great Depression.

But with a rate hike unlikely until March at the earliest, Trump's anger with his preferred economic scapegoat appears to be easing.

“The Fed is not doing what it’s doing because of pressure from the president. They’re doing what they’re doing because the data is changing,” said Karen Petrou, managing partner at Federal Financial Analytics.

Trump has been focused on his current fight with Democrats, saying little about the Fed since the partial government shutdown began Dec. 22. The shutdown is already the longest in U.S. history and heading into a second month. Instead of raging at the Fed, Trump has focused his anger on congressional Democrats who refused his request for $5.7 billion to build a wall along the U.S. border with Mexico.

The shutdown has dampened economic growth and decimated consumer confidence in the economy since its start. More than 800,000 federal employees have gone unpaid during the shutdown with some workers struggling to make ends meet.

Private and public sector economists, including those at the White House and Fed, are projecting the shutdown will cause deeper economic pain than first expected.

The White House doubled its estimate on how much the shutdown is costing the economy, estimating a 0.13 percentage point hit to quarterly growth each week it lasts. Other economists have warned the shutdown could trigger stagnation or a recession if it stretches longer.

With the shutdown cooling off the economy, Fed officials have begun stressing patience after years of justifying rate hikes to stay ahead of rising inflation.

Several of the central bank’s top policymakers have hinted at a pause in rate hikes in recent speeches.

During a speaking event in Washington on Jan. 10, Powell warned of the harm the shutdown could bring to the economy and said the Fed “can be patient and flexible and wait and see what does evolve” before hiking rates again.

Fed Vice Chairman Richard Clarida said in a speech later that same day that the bank should be ready to hold off on rate hikes if global economic growth continues to falter.

Several reserve bank presidents chimed in soon after with their own calls to tap the brakes, including from one of the Fed system’s most ardent supporters of rate hikes. Kansas City Fed President Esther George, a Fed inflation hawk, said Tuesday “it seems to me that we can be patient.”

The cooling of tensions between Trump and the Fed comes after months of sharp attacks from the president on his own hand-picked central bank chief. 

Bloomberg reported in December that Trump had even discussed firing Powell, remarks which shocked advisers. Bank watchers said such a move would be unprecedented and debated if Trump had the power to force out Powell.

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In January, Powell addressed the controversy, saying that he would not resign even if asked by the president and touting the bank's independence.

“People should know the Fed has a very strong culture around nonpolitical activity,” said Powell who was speaking at an event with his predecessors, former Fed chiefs Ben Bernanke and Janet YellenJanet Louise YellenTrump considering Herman Cain for Federal Reserve seat: report New year, new Fed Rise of the stock market vigilantes MORE. “It’s very much in the DNA of anyone who has spent any time at the Fed.”

But while Trump's feud with the Fed has calmed for now, economic watchers note that troubling economic indicators and growing worries about the damage from the shutdown signal bigger problems for Trump.

“Things keep changing and none for the better,” Petrou said.

The shutdown is the latest worry for the U.S. economy but the Fed is also eyeing a slowdown in emerging market economies, the mounting costs of Trump’s trade battles, and myriad domestic and international political concerns. Wall Street’s bloody end to 2018 and slumping consumer growth has also weighed on the economic outlook.

For the Fed, the economic data has posed new questions and challenges.

The Fed has been puzzled by inflation that has persisted just below the central bank’s target of 2 percent. With unemployment at a near-record low of 3.7 percent, Fed officials had been bracing for the tight labor market to boost prices and wages beyond a sustainable level.

“With inflation muted, I believe that the Committee can afford to be patient as we see how the data evolve in 2019,” Clarida said last week, referring to the Fed’s interest-rate setting Federal Open Markets Committee.

If the economy cools before inflation picks up, the Fed could hold off on rate hikes for the foreseeable future.

Charles Gabriel, president of policy analytics firm Capital Alpha Partners, said that whether the Fed hikes rates at all depends on what happens on several economic fronts.

Gabriel wrote in a note on Wednesday that the Fed may not see grounds to hike unless the shutdown is resolved soon, Trump begins to ease U.S. tariffs, the Brexit drama in the United Kingdom stabilizes and the White House is able to handle the upcoming debt limit reimposition.

But Gabriel also acknowledged that was a challenging set of circumstances.

“Despite the seeming gauntlet we’ve described above, we suspect 2019 could be a good year for investors,” Gabriel added, "provided that trade barbs are softened and the Fed eases up."