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Investors See Trump's Fed Criticism as Threat to Independence

Investors See Trump's Fed Criticism as Threat to Independence
(Matthew Veldhuis/Dreamstime)

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Tuesday, 21 August 2018 08:11 AM Current | Bio | Archive

President Donald Trump said in an interview to Reuters he was “not thrilled” with the Federal Reserve under his own appointee, Chairman Jerome Powell, for raising interest rates and said the U.S. central bank should do more to help him to boost the economy.

American presidents have rarely criticized the Fed in recent decades because its independence has been seen as important for economic stability. Trump has departed from this past practice and said he would not shy from future criticism should the Fed keep lifting rates.

“I’m not thrilled with his raising of interest rates, no. I’m not thrilled,” Trump told Reuters, referring to Powell. Trump nominated Powell last year to replace former Fed Chair Janet Yellen.

Markets have not particularly liked president’s comments seeing them as a threat to the independence of the Federal Reserve.

Maybe it could be helpful to recall that the Federal Reserve is independent more by custom than by statute. The monetary decisions of the Federal Reserve do not have to be ratified by the President or anyone else in the Executive Branch. The Fed receives no funding from Congress, and the members of the Board of Governors of the Federal Reserve, who are appointed, serve 14-year terms. These terms do not coincide with presidential terms, creating further independence.

However, the Federal Reserve is subject to oversight by Congress, which aims to ensure it achieves the economic objectives of maximum employment and stable prices. And the Fed chair must submit a semi-annual report on monetary policy to Congress.

The low and stable inflation environment of the last 20 years can be directly attributed to the independence of the world’s central banks. Threatening that is not helpful.

Besides all that, Trump also said during the Reuters interview that China was manipulating its yuan currency (CNY) to make up for having to pay tariffs on imports imposed by Washington. “I think China’s manipulating their currency, absolutely. And I think the euro is being manipulated also,” Trump said.

“What they’re doing is making up for the fact that they’re now paying ... hundreds of millions of dollars and in some cases billions of dollars into the United States Treasury. And so, they’re being accommodated and I’m not. And I’ll still win.”

Trump has frequently accused China of manipulating its currency, but his administration has so far declined to name China formally as a currency manipulator and has also confirmed this standpoint in its latest semi-annual report from the U.S. Treasury Department that was released in April.

Nevertheless, it’s a fact that the U.S. dollar has strengthened this year by 5.35 percent against the yuan (CNY), reversing most of its large drop against the Chinese currency in 2017.

The euro is off by about 4.3 percent against the greenback this year, beset by concerns over the pace of economic growth in the EU trading bloc and over U.S.-European trade tensions.

Trump has made reducing U.S. trade deficits a priority and the combination of rising interest rates and a strengthening dollar pose risks for export growth.

President Trump also suggested that the forthcoming trade talks with China would not accomplish much. These remarks were also made in an interview, so they do not carry the weight and impact of a proclamation on the Trump Twitter feed but nonetheless have attracted attention.

It’s hard to know whether these remarks are meant to be taken seriously or whether they are a part of the "art of the deal" negotiation style.

Investors could do well remembering that President Trump was also downplaying prospects for agreement with the European Union (EU) before completely giving in to Jean-Claude Juncker, President of the European Commission, although that seems a less likely outcome with China this time.

All that said, there is something like a sense that markets are really waiting for the Federal Reserve Bank of Kansas City’s Economic Policy Symposium in Jackson Hole, Wyo. that takes place under the theme: “Changing Market Structure and Implications for Monetary Policy” on August 23 – 25, which is a get-together that may have heightened importance given the yesterday’s remarks given by President Trump.

Of course, the main attention will go to Fed Chair Powell’s speech he will give at 10 am EDT on Friday morning and that is entitled “Monetary Policy in a Changing Economy.”

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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Markets have not particularly liked president’s comments seeing them as a threat to the independence of the Federal Reserve.
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2018-11-21
Tuesday, 21 August 2018 08:11 AM
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