International Monetary Fund managing director Christine Lagarde said she "would not associate" Federal Reserve Chairman Jerome Powell "with craziness" after US President Donald Trump commented that the central bank, which has been raising US interest rates, had "gone insane", CNBC reported on Thursday.
If Trump goes further and tries to remove Powell or otherwise influence Fed policy, it could cause him bigger problems. "I just don't think it's necessary to go as fast".
Earlier in the day, Trump told the Fox & Friends television broadcast that the central bank was "making a big mistake" by being "too aggressive" in raising rates. Presidents for more than two decades had avoided public comments on the Fed's interest-rate policies as a way of demonstrating respect for the institution's independence.
The Federal Reserve has steadily tightened monetary policy amid an economic boom in the United States, something Trump has repeatedly criticized. "But I think it's far too stringent far too fast".
Reporters asked the president as he deplaned in Erie, Pennsylvania, if he was concerned about Wednesday's market selloff. "They're so tight. I think the Fed has gone insane", Trump said.
Trump's comments about the Fed going "crazy" came in contrast to a more measured statement issued by the White House about how the economy was strong. But history and precedent tell us that the Fed's ability to cause a sudden stock market crash may actually be limited.
"The truth is the Federal Reserve did go insane a few years ago and drove interests rate down to zero which had never happened in history".
A neutral rate enables economic growth without the risk of significant inflation. Higher interest rates makes it more expensive to borrow money, giving consumers or businesses pause before taking out a loan.
Just as the economy hits these bumps, the boost to growth from the giant tax cuts Trump enacted last December and additional government spending approved this year is expected to fade.
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One reason why the Fed has been raising interest rates even with little sign of an inflation breakout is because the unemployment rate, which fell to 3.7 percent in September, is at a level that many officials expect will cause wage and price gains to accelerate over time.
Critics said it was convenient for Trump to blame the Fed when really his trade war with China- which is harming the global economy and raising prices for ordinary Americans - is to blame. The IMF cited Trump's tariffs and rising interest rates.
Former Treasury Secretary Larry Summers said the economy was on a "sugar high" that had been fueling stock prices. But the logic behind the Fed policy is not founded on inflation.
Meanwhile, yields in Europe remain suppressed: the European Central Bank is planning to stop its bond-buying program by the end of this year, but it's not going to start unwinding its $3.8-trillion bond holdings anytime soon.
Another problem with heightened inflation expectations is that real inflation hasn't shown much life.
The International Monetary Fund this week downgraded its forecastof USA growth, which it now predicts will be 2.5 percent next year.
Mr Trump is correct in saying that rising interest rates tend to strengthen the U.S. dollar, as investors return funds to the United States in search of higher returns and safer investments.
It's often said that stock markets, whether good or bad, are unfairly linked to whoever sits in the Oval Office.