U.S. President Donald Trump’s criticism of the Federal Reserve has a “polarizing effect” on Americans and distorts inflation expectations, according to new research, showing that the central bank has become politicized despite being legally separate from the executive branch.

The study published in Economics & Politics showed that U.S. citizens’ inflation expectations were more likely to be significantly higher than the central bank’s 2% target after they were shown a Trump tweet criticizing Fed policy. Additionally, respondents provided more context about the dynamic between the president and the Fed developed more polarizing views, displaying an increasing amount of confidence in either the central bank or the president. 

“The inflation targeting strategy is maybe less effective at shaping expectations when there’s more political pressure on the bank,” said Carola Binder, the professor of economics at Haverford College in Pennsylvania who conducted the study last year, before the Federal Reserve lowered rates to near-zero during the coronavirus pandemic. 

Consumer expectations of inflation can influence the actual rate of inflation as they make decisions about what prices to pay or wages to accept. Expectations of inflation tend to overshoot actual inflation somewhat. The disparity between the Fed’s inflation target and consumer expectations was more pronounced in study participants who viewed Trump tweets.

Presidents before Trump generally avoided commenting publicly on Fed policy, seeking to uphold the central bank’s reputation of political independence. But Trump has taken a more assertive approach, publicly criticizing the Fed and personally attacking Chairman Jay Powell, especially over stimulus measures and interest rates.

“The Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt,” Trump said on Twitter in September of 2019. “INTEREST COST COULD BE BROUGHT WAY DOWN, while at the same time substantially lengthening the term.” 

Much of Binder’s research has focused on how central bank communication and media coverage influence expectations, given a general public that does not closely follow the nuances of monetary policy. Within that context, Trump’s aggressive statements on the Fed sparked her interest.

“It was big news when the U.S. president started doing this, but it was a new thing and we didn’t have much evidence on what those tweets would do to public opinion about the Fed,” said Binder, who has a doctorate in economics from the University of California, Berkeley. 

Binder launched the study in October of 2019, using a survey she designed via software Qaltrics. She found respondents through Amazon Mechanical Turk, an online on-demand tasks service. 

Participants, who were U.S. citizens aged 18 and older, were divided into three groups. The control group was shown information about past inflation and the Fed’s inflation target without political context. The second group was shown Trump’s September tweet about the Fed, in addition to the same information about previous inflation and targets. The third group was shown all of that content plus a Washington Post column criticizing Trump for compromising the Fed’s independence.    

Both the tweet group and the tweet-plus-article group reported inflation expectations that were farther from the Fed’s goal than the control group. Just 34% of respondents in either group that was shown the tweet expected long-run inflation would match the Fed’s 2% target, compared with 50% of the control group. 

Binder argued that this divergence in expectations could undermine the Fed’s credibility with the general public, especially if politicians continue to actively politicize the central bank after Trump leaves office. Economists can sometimes focus too intently on the Fed’s precise messaging, while the general public’s views are more informed by politicians, she added.  

“Central banks try to communicate with the public,” Binder said. “But at the same time they're competing with politicians who are also trying to communicate with the public.”

Binder’s use of Amazon Mechanical Turk allowed her to reach a more geographically diverse group of Americans than by, for example, knocking on doors in the Philadelphia suburbs around Haverford’s campus. But the average Mechanical Turk user is likely more internet savvy than the typical American and may have a different annual income, which could muddle the study’s results, Binder said. 

However, the platform allowed Binder to conduct more extensive research than she could relying on more traditional methods.

“I’m at a small liberal arts college so I don’t have an enormous research budget that people would have at a large research university,” she said. 

Participants were paid the equivalent of Pennsylvania minimum wage, which is currently $7.25 per hour. 

The study, titled “Presidential Antagonism and Central Bank Credibility,” was published on November, 28 in Economics & Politics. The author of the study was Carola Binder, Haverford College.