Two months before he was elected president of the US in September 2016, Donald Trump said Federal Reserve chair Janet Yellen should be 'ashamed of herself' for keeping interest rates low and creating a 'false stock market', saying that the central bank’s policies were hurting savers and pension plans.
It therefore seems rather strange that he should now be criticising the current incumbent, and his choice as Fed chair, for not keeping rates low but pushing them higher.
The US president’s comments last month, and which he repeated last night, was that he was 'not thrilled' with Jerome Powell and the Federal Reserve, for its consistent policy of raising interest rates, saying he should be given more help by the Fed.
Unfortunately for the president that’s not how it works under the Fed’s mandate, and while he has pledged to continue to criticise the Fed if it continues to raise rates, his criticism, while unwelcome and unusual for a US president, is unlikely to stop the Fed from hiking again next month, or later this year.
If anything the president’s comments in driving down the US dollar could make it easier for the Fed to hike rates, as they could mitigate the upside in the US dollar, as a strong currency tends to have a deflationary effect.
In any case, even before yesterday’s comments, there was already a debate going on in the markets, as to the wisdom of the Fed going too quickly where rates are concerned. The crisis in emerging markets, concerns about trade, as well as geopolitics, were causing some to question whether the Fed should look at revising its guidance.
The worry is that the president’s interventions will make it much harder to have that debate, without accusations that the Fed is being manipulated. With an economy set to continue to expand at around 4%, the Fed does need to be acutely aware of the possibility that the economy may well overheat as a result of the fiscal stimulus that is still helping juice the current economic expansion.
Someone should tell President Trump that the central bank hiking rates is a vote of confidence in the US economy, and thus his stewardship of it, and will also help those savers he claimed to be so worried about in 2016. He may than look at it through a slightly different lens. Of course he could be also getting his excuses in early in the event we start to see a slowdown over the next few quarters, as he blames the Fed for slowing the economy.
The wider point is that markets may be overanalysing yesterday’s comments, given that Mr Trump also criticised the Chinese central bank as well as the European Central Bank (ECB) for keeping their currencies artificially weak, and what he said isn’t exactly new. It’s also something that central banks have been doing for years with rather mixed success, with the Bank of Japan being a case in point.
The wider problem is that its not so much that the US dollar is too strong, it's that the ECB and the People's Bank of China are in no position to raise interest rates, which means that any interest-rate differrential is only likely to get wider, unless the Fed decides to call a halt to its normalisation programme.
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