“The Federal Reserve is meant to be independent of parochial political interests. But it’s got to operate – I think of this as a kind of band, sometimes wide, sometimes narrow – within the range of understanding of the public and the political system. You just can’t go do something that is just outside the bounds of what people can understand, because you won’t be independent for very long if you do that.”

– Paul A. Volcker, chairman of the Federal Reserve Board, 1979-1987

It was predictable that President Trump would attack the Federal Reserve and, by extension, its new chairman, Jerome Powell. Guess who nominated Powell: Why, Trump of course! The president’s style is to have a fallback – someone or something – to blame if events don’t go as promised. Powell and the Fed are being set up for the possibility that the economy, which grew at an annual rate of 4 percent in the second quarter, disappoints.

Since December 2015, the Fed has been gradually raising short-term interest rates to pre-empt higher inflation. The so-called Fed funds rate (the rate banks pay to borrow overnight) has gone from a maximum of 0.25 percent to 2.0 percent, which is still low historically. Unlike recent presidents, starting with Bill Clinton, Trump apparently isn’t worried about compromising the Fed’s independence.

“I am not happy about [higher interest rates],” he told CNBC. “I don’t like all this work we’re putting into the economy and then I see rates going up.” As for those who say that presidents shouldn’t criticize the Fed, “I couldn’t care less what they say, because my views haven’t changed (since becoming president).”

There is much confusion over the Fed’s “independence.” The Fed is not a free agent or a rogue agency. It can’t do anything it pleases. As Volcker indicated (see above), the Fed must conform to prevailing beliefs and political demands. And so it has, for better or worse.

The Fed helped finance World War II by buying U.S. Treasury securities and keeping interest rates low. In a famous “accord” between the Treasury and the Fed, it was relieved of that responsibility in 1951. In the 1960s and 1970s, the Fed adopted the latest economic fad – Keynesianism, after English economist John Maynard Keynes. This led to disastrous double-digit inflation (13 percent in 1979).

The Fed could crush this inflation in the 1980s, Volcker has argued, because Americans so dislike surging prices that they accepted a savage slump (peak monthly unemployment: 10.8 percent) as a cure. Likewise, the Fed cooperated with George W. Bush and Barack Obama to contain the 2008-09 financial crisis. Though influential, the Fed was not strictly independent.

The question of independence mostly centers on interest rates. The presumption is that politicians favor low rates – “easy money” – and if they control the Fed’s decisions, the result will be a permanent inflationary bias. By contrast, an independent Fed would set interest rates based on what’s best for the economy’s long-term well-being, not the next election.

Since the Great Recession’s end in 2009, the monthly unemployment rate has dropped from 10 percent to 4 percent, even while inflation, as measured by the so-called PCE index, has stayed tame at 2 percent or less. But now pressures are intensifying. In January, the PCE index was up 1.6 percent from a year earlier; by May, the year-over-year gain was 2.3 percent.

The Fed faces a classic problem: setting interest rates high enough to check inflation and low enough to permit continued economic and job expansion. Economist David Stockton of the Peterson Institute, a former top Fed official, thinks the unemployment rate could drop to 3.5 percent or 3.25 percent by late 2019 – numbers unseen since the 1960s. “We’re in uncharted territory,” he says.

It’s true that recent presidents have refrained from criticizing the Fed. The change was suggested by Robert Rubin, director of the National Economic Council and later secretary of the Treasury in the Clinton administration. Before this, presidents and the Fed often clashed. In 1965, the Fed defied President Lyndon Johnson and raised rates. Johnson summoned Fed Chairman William McChesney Martin to his Texas ranch and chewed him out.

“You’ve got me in a position where you can run a rapier into me, and you’ve done it,” Johnson said, according to Martin’s later account. “You went ahead and did something I disapproved of. … I just want you to know that’s a despicable thing to do.”

What’s unclear is whether Trump will respect the new tradition. This first assault on the Fed was mild. “If it stops here and now, it’s not much,” as former Fed Vice Chairman Alan Blinder told the Washington Post’s David Lynch. But for Trump to stop would require unusual self-restraint for him.