Kudlow warns Fed against hiking interest rates quickly

Jeanna Smialek and Alister Bull
Bloomberg News

The Federal Reserve’s independence and monetary-policy approach had a White House ally in Gary Cohn. His successor Larry Kudlow may be a different story.

“Just let it rip, for heaven’s sake,” Kudlow said of economic growth in the U.S., during a more than hour-long interview Wednesday on CNBC. “The market’s going to take care of itself. The whole story’s going to take care of itself. The Fed’s going to do what it has to do, but I hope they don’t overdo it.”

That last comment was an apparent reference to the Federal Reserve’s moves to raise interest rates, which it has done five times since December 2015 and is expected to do so again when it meets next week.

Kudlow, President Donald Trump’s pick to replace Cohn as director of his National Economic Council, has criticized the central bank’s policies over the past year, saying the Fed is using the wrong models to assess inflation and that it doesn’t have power to move prices one way or another. That’s a big slap, because policy makers’ dual mandate requires them to promote stable prices.

Kudlow’s views come in stark contrast to Cohn, a one-time front-runner to lead the Fed, who adopted a much more careful tone when talking about the central bank, saying “the Federal Reserve is an independent agency and they operate as such” when asked about looming rate hikes on Fox News last year.

Kudlow, who once worked as a staff economist at the New York Fed, has not joined Trump’s team yet. But if he keeps up his criticism of the central bank once he’s in the job, it could be important. Trump has said he’s a “low interest-rate” person, though he has been mostly silent on Fed policy since becoming president.

The rest of his administration has mostly followed suit. While White House chief economist Kevin Hassett said in January that the Fed wouldn’t need to pick up the pace of rate increases in response to Trump’s tax overhaul, that’s a softer statement than the one Kudlow made in his CNBC interview on Wednesday.

Fed policy makers are actively hiking interest rates and expect to lift them three times this year. Policy tightening dampens economic growth and has drawn ire from incumbent politicians in the past. Since Bill Clinton’s presidency, however, the executive branch has made a habit of staying quiet on central bank policy.

Trump’s new adviser has in the past suggested that as tax cuts kicked in, it could actually give the Fed more room to move.

Last July, Kudlow said former Fed Chair Janet Yellen should show “restraint” in lifting rates, adding that “what she needs – she won’t say this – she needs Trumps tax cuts to spur the economy, and so real interest rates will go up and she can follow them up – but if she keeps doing, you know, peck, peck, peck on this, I don’t know why she has to do it now.”