Tags: trump | fed | inflation | indepence

Trump Threatens Fed Independence, Investor Faith in Inflation Control

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Wednesday, 17 October 2018 09:57 AM Current | Bio | Archive

President Trump Comments on Interest Rates and Saudi Arabia

On September 5, 2016, Reuters reported that the then Republican presidential nominee Donald Trump, who had previously accused the Federal Reserve of keeping interest rates low to help President Barack Obama, had said that the U.S. central bank had created a “false economy” and that interest rates should change.

“They’re keeping the rates down so that everything else doesn’t go down,” he said in response to a reporter’s request to address a potential rate hike by the Federal Reserve at that time in September, which by the way it didn’t, and rates remained unchanged on September 21, 2016.

Trump said at the time: “We have a very false economy. At some point the rates are going to have to change. The only thing that is strong is the artificial stock market.”

It might be interesting to take note that at that time, the “real” fed funds rate was minus 0.6 percent and unemployment was at 5 percent.

President Trump said yesterday the Federal Reserve was his “biggest threat,” again criticizing the central bank for endangering economic growth through interest-rate hikes.

“The Fed is raising rates too fast,” Trump said Tuesday in an interview with “Trish Regan Primetime” on Fox Business Network.

To put all this into some kind of context, it’s fact that the “real” fed funds rate in September was minus 0.05 percent and in August it was minus 0.7 percent. Unemployment is 3.7 percent.

No, the Fed is not “loco.” The Fed is gradually raising interest rates and in doing so, has barely moved the “real” cost of borrowing.

There are two very serious threats that arise from this situation, however.

The first is that the U.S. president undermines the independence of the Fed. The main reason, perhaps the only reason that inflation has been brought under control in major economies is central bank independence.

If markets think the Fed loses its independence, investors will be right to lose faith in U.S. inflation control.

The second alternative is the reverse. If the Fed feels it has to prove its independence, which I think will not be the case, it may “err” on the side of hawkishness to prove that it is independent. That would give a bias to a monetary policy that does not currently exist.

The good news is that to change the Federal Reserve would require an act of Congress.

This cannot be done by presidential whim. The hike-pause, hike-pause cycle of the Fed should continue and, at least in my opinion, it is entirely economically justified.

Other comments from President Trump suggest that he is unlikely to rush to apply sanctions against Saudi Arabia. The president who suggested very quickly that “rogue elements” may have broken through the security of the Saudi consulate in Istanbul, Turkey, is now suggesting that people have been too quick to judge Saudi Arabia.

Crude oil prices have shown some signs of stability.

However, the U.S. Congress may not be as credulous of the idea of “rogue elements” as President Trump seems to be, and Congress has passed veto-proof sanctions on previous occasions.

U.S.-UK Trade Talks

The Financial Times reports that the Trump administration has told Congress that it wants to start formal trade talks with the UK “as soon as it is ready” after Brexit, which is a sign that negotiations with London are a priority even as Washington seeks separate deals with the EU and Japan and fights a trade war with China.

The notification from Robert Lighthizer, the U.S. trade representative, to Orrin Hatch, the chairman of the Senate finance committee, came in a letter sent on Tuesday, as the UK was engaged in a tense, last-ditch round of negotiations with Brussels over the terms of Brexit.

Brexit

Meanwhile, the UK’s interminably tedious process of cutting the European Union (EU) off from the UK single market continues. The European heads of government meet today in Luxemburg. UK Prime Minister Theresa May will go along to suggest that the European Union (EU) might be allowed access to “all” of the UK customs union on a temporary basis.

Nothing will come out of this and a deal will be done at the last minute, but we are still some weeks away from the "last minute." In fact, no one actually knows when the "last minute" is, but we do know that the "last minute" is not now.

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

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HansParisis
No, the Fed is not “loco.” The Fed is gradually raising interest rates and in doing so, has barely moved the “real” cost of borrowing.
trump, fed, inflation, indepence
754
2018-57-17
Wednesday, 17 October 2018 09:57 AM
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