By Greg Ip 

In a presidency that has seen almost every institution from the FBI to the Supreme Court consumed by division and controversy, the Federal Reserve is a shining exception. President Donald Trump's nominees are widely seen as competent, careful and apolitical.

Mr. Trump's lengthy riff on interest rates Thursday risks tainting that. In an interview with CNBC he declared himself unhappy that Fed Chairman Jerome Powell keeps raising rates. If not an actual violation of Fed independence-- he was complaining, not instructing -- it was still a jarring departure from the recent tradition of presidents leaving the central bank alone.

He resumed his criticism Friday morning, taking to Twitter to say raising interest rates "hurts all that we have done." He added, "The U.S. should be allowed to recapture what was lost due to illegal currency manipulation and BAD Trade Deals. Debt coming due & we are raising rates - Really?"

This isn't just a problem for the Fed, which wants its decisions seen as driven entirely by economics and data; it's a problem for Mr. Trump. Inserting himself into monetary policy has virtually no upside and plenty of downside.

Start with the fact that on the substance, his complaint is baffling. No president since the 1950s has simultaneously enjoyed such a strong economy and such cheap credit. The expansion is the second longest in history, growth has accelerated to around 3% thanks to massive fiscal stimulus, unemployment at 4% is below most estimates of its natural rate, and inflation sits at the Fed's 2% target. And yet interest rates, after rising slowly for two years, sit just below 2% -- zero in real terms.

Mr. Trump is especially upset by the dollar's rise, which threatens to widen the trade deficit which he badly wants to shrink. Yet the Fed is the secondary player here. The dollar is up against the euro because Mr. Trump's tax cut is lifting U.S. growth above Europe's. The dollar has risen against the yuan because the Chinese government is trying to neutralize Mr. Trump's tariffs with a cheaper currency.

Not only are rates unusually low given the economic backdrop, they are likely to stay that way. Despite predictions the Fed would offset the stimulative benefits of the tax cut, the Fed's rate plans have barely changed since it went into effect.

Of all the candidates Mr. Trump could have put in charge of the Fed, Mr. Powell is the most dovish. Suppose he had picked John Taylor, a Stanford University economist, as congressional Republicans wanted? The Fed's monetary policy report released last week shows that under the rules Mr. Taylor has popularized, rates today would already be at least 3%. Even Janet Yellen, the Ph.D. economist appointed by Barack Obama whom Mr. Powell succeeded, would be more worried about inflation given today's low unemployment than Mr. Powell is.

Not only does Mr. Trump get a dovish Fed, he gets one perceived as competent and nonpartisan. Mr. Powell was confirmed by the Senate 84 to 13. Mr. Trump's pick for the vice chairman, economist Richard Clarida, will likely get comparable treatment judging by the many Democrats on the Senate Banking Committee who backed his nomination.

Mr. Powell has worked hard to maintain that image of nonpartisan technocratic competence. In hearings this week he steered clear of politically contentious debates such as whether the U.S. was in a trade war. His extensive outreach to Capitol Hill earned him praise from Democrats and Republicans alike.

One outburst by Mr. Trump won't flush that away, but a few more might. And for what? Why would Mr. Powell do anything differently? He has nothing to gain personally from bending policy to suit the president -- he can't be fired and his term has nearly four years to go. If the Federal Open Market Committee's other members thought he'd been politicized, they'd vote against him in a heartbeat. The market seems to have concluded the same thing: Its outlook on future rates barely reacted Thursday.

Arguably the opposite could happen. It is unlikely any official, least of all the chairman, would vote to raise rates solely to prove the Fed's independence. But some of Mr. Powell's colleagues wavering between one and two more rate increases this year might go for two as a show of autonomy. If the economic outlook or inflation softened unexpectedly, some officials may be slow to abandon planned rate increases for fear it would look political.

The bigger problem -- for the president and the Fed -- is optics. Investors will filter his actions and utterances through politics: Did he do that to please -- or defy -- the president? Expect every Congressional hearing and every press conference to include a question about his interactions with the White House. His schedules show that since becoming chairman, he has not met with Mr. Trump; given the arched eyebrows it's sure to provoke, he'll think twice before doing so now. And that's a pity because there may be times, for example during a crisis, when for the good of the country he should.

Mr. Trump's nominees to the Fed have so far gotten the benefit of the doubt; they may no longer. Any with suspiciously dovish inclinations will face opposition from Senate Democrats. Mr. Trump's record on the Fed until Thursday was one of which he could be justifiably proud; shame if it ends up as politicized as everything else.

Write to Greg Ip at greg.ip@wsj.com

(END) Dow Jones Newswires

July 20, 2018 09:49 ET (13:49 GMT)