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Does Trump get one thing right about the Fed?

President Trump is shown during an interview with Washington Post reporters Philip Rucker and Josh Dawsey in the Oval Office on Nov. 27, 2018. (Jabin Botsford/The Washington Post)

The Federal Reserve is on track to raise its interest rate target again in December, performing its duty to cool an overheating economy. In doing so, it has raised the ire of the president.

Federal Reserve Chair Jerome H. Powell’s remarks before the Economic Club of New York on Wednesday seemed to moderate the central bank’s stance somewhat, slowing the pace of increases, but the Fed remains committed to raising interest rates.

And President Trump still appears to consider it unfair that the Fed is threatening to slow his roll. The central bank has raised its interest-rate target six times since Trump took office. The president appears to find the Fed’s intervention particularly nettlesome, given that the central bank boosted growth under President Barack Obama by keeping lending cheap with near-zero interest rates.

The Fed also injected trillions of dollars into the economy through an asset-purchase program known as quantitative easing. In recent years, the Fed has started taking those trillions back out of the economy at a rate that can approach $50 billion a month.

“I’m not playing by the same rules as Obama,” Trump told Post reporters Philip Rucker and Josh Dawsey on Tuesday. “Obama had zero interest to worry about; we’re paying interest, a lot of interest. He wasn’t paying down — we’re talking about $50 billion lots of different times, paying down and knocking out liquidity.”

The timeline is a bit more complicated than the president portrays it. Lower interest rates and quantitative easing both began during President George W. Bush’s second term. The Fed began the turnaround that is the subject of Trump’s complaints — raising rates and allowing assets to run off — during Obama’s second term.

Trump plays fast and loose with specifics, but he asks a legitimate question: Is it time to raise rates? It’s a line of inquiry that aligns him with economists who might not seem to be his natural allies.

Why is the Fed raising rates?

The Fed walks a fine line. It needs to stockpile ammunition to fight the next recession without causing that same recession in the process. Officials would like higher interest rates and a clean balance sheet heading into a downturn. They would like to prevent price swings whose knock-on effects could spark said downturn by keeping inflation near their 2 percent target rate.

The broadest version of the Fed’s preferred measure of inflation has been at or above the 2 percent target rate since March. And the economy has grown at an annualized rate of 4.2 and 3.5 percent in the two most recent quarters, well above its long-term average.

The U.S. unemployment rate hit 3.7 percent in September. That’s well below estimates of where unemployment can settle without causing rapid price growth. Economic theory holds that as unemployed workers become scarce, employers are forced to raise wages to compete for employees. As a result, workers have more to spend, and prices rise.

At their late-September meeting, most members of the Fed’s Open Market Committee predicted that rates would settle between 2.8 and 3.0 percent in the long run. Most FOMC members think the target will be even higher in two or three years.

The projections imply that the rate target, which currently sits at 2.0 to 2.25 percent, needs to be raised at least two and likely three more times.

Some economists agree with Trump

Some prominent economists, including several who served in the Obama administration, seem to agree with elements of Trump’s argument. They say the Fed should move slowly because the economy is not as good as it seems, especially for disadvantaged groups.

The Fed raises rates to keep the economy from overheating. But what if it’s not running as hot as we think? Core inflation, which strips out the volatile food and energy categories, has settled near the 2 percent target level in recent months. But Federal Reserve Bank of San Francisco economist Adam Shapiro wrote on Monday that rising prices were likely attributable to “idiosyncratic factors” rather than “overall economic conditions.” Examples of idiosyncratic factors include ripple effects from Verizon’s change in cellphone plan pricing and a 10 percent increase in fees for financial services such as automatic tellers and credit cards.

Harvard economist Jason Furman, who served as chairman of the Council of Economic Advisers in the Obama White House, also played down concerns about rising inflation. In the Wall Street Journal, Furman argued that the Fed should hold off on rate increases, especially given recent economic warning signs.

“Surprisingly low inflation” despite a tight labor market is “the biggest reason for caution,” Furman writes, noting that price growth looks much slower when one considers core inflation over a shorter time frame. While it’s possible inflation will pick back up, he writes, “there would be little downside to the Fed waiting a few months,” especially given global head winds, a drop in the S&P 500, rising interest rates and a strengthening dollar.

Jared Bernstein, who was Vice President Joe Biden’s chief economist and is now a senior fellow at the Center on Budget and Policy Priorities, said the Fed should worry more about the consequences of undercutting demand with a rate hike than about the consequences of letting inflation rise a bit above the Fed’s target.

Bernstein pointed out that a spate of higher inflation might, on average, help make up for the slow price growth that has dogged much of the recovery.

“Two percent is not a ceiling; 2 percent is an average,” Bernstein said. “And all these downside misses mean there should be periods of upside misses.”

Bernstein has also argued in The Washington Post that it would be unfair to slow growth just as the recovery is reaching some of the country’s most disadvantaged workers. Blue-collar and less-educated workers, and minorities and workers with mental and physical limitations are finally starting to benefit from a tight labor market.