Trump’s Inconsistencies Threatens The Fed’s Independence
Inconsistencies depicted by President, Donald Trump, is one of the reasons why presidents are not supposed to weigh in on monetary policies carried out by central banks. Long before assuming office, Mr. Trump had indicated that he was going to break precedence and take the Federal Reserve head on, even though the agency is supposed to operate without any political interference.
The Federal Reserve’s Responsibility
Formed in the 20th century, The Federal Reserve acts as the U.S Central bank tasked with the responsibility of formulating monetary policies for keeping inflation and the economy in check. The Financial institution has gradually raised and cut interest rates as part of its monetary policies over the years.
The FED is thus tasked’ with a delicate job of ensuring a balance in interest rates based on economic cycles. Raising interest rates too fast can significantly affect growth. Moving slowly is also not an option as the same can cause the economy to ignite, prompting another recession.
The agency has already raised interest rates two times this year, amidst talk that there could be two more hikes before the end of the year. Interest rate hike and talk of further hikes have gone a long way in strengthening the dollar against other world currencies.
Debacle of the Strong Dollar
Interest rates hikes resulting in a stronger dollar have not gone well with President Trump who has in the recent past lamented that they are causing the dollar to strengthen for no good reason. According to the President, a strengthened dollar could exacerbate the country’s trade deficit which is already at an all-time high.
A strengthened dollar makes imports cheap. Conversely, a strengthened dollar also makes U.S exports extremely expensive, something that has seen the U.S lose business to the likes of China offering similar products.
President Trump has since taken issue with a strengthened dollar, which he maintains is not good for business even though it is one of the hallmarks of a robust economy. According to the Commander in Chief, the FED needs to go slow on further hikes as a way of ensuring the U.S does not remain disadvantaged on international trade.
A strengthened dollar triggers an outflow of capital as investors pursue cheaper investment opportunities.
And, unlike the U.S, China does not let its national currency float freely like the dollar. Instead, the country’s central bank issues daily trading range for the currency as a way of keeping it competitive against other currencies; something that critics insist amounts to currency manipulation.
Trump taking a swipe at the Federal Reserve for hiking interest rates continues to underscores inconsistencies in what he often says. Prior to assuming office, he had consistently taken the Fed to task for keeping interest rates low, going as far as criticizing the then FED chair Janet Yellen.
“Fed Chair Janet Yellen and central bank policymakers are very political, and Yellen should be “ashamed” of what she’s doing to the country,” said Mr. Trump then GOP presidential nominee.
Trump had also insinuated that the FED was at the time keeping interest rates low because it is what President Barack Obama needed to strengthen his legacy.
“Any increase at all will be a very, very small increase because they want to keep the market up, so Obama goes out and let the new guy … raise interest rates … and watch what happens in the stock market,” said Mr. Trump.
U.S Presidents vs. the Fed
While President Obama did try to avoid confrontation or a standoff with the Federal Reserve, Trump is not the first president to question the agency’s policies. President Richard Nixon did his fair share in bullying the agency into interest rate cuts, leading up to the 1972 election.
The agency of the time was pressured into initiating a string of interest rate cuts which had a negative impact on the economy, and triggered out of control inflation levels. President George H.W was not successful in bossing the Fed around, as then chairman Alan Greenspan held firm against calls for lower interest rates.
It is not a secret that Trump cherishes a strong dollar but at the same time wants the U.S to be in position to call the shots on both export and import trades. His consistent swipes at the Fed all but raises concerns as to whether the agency will be able to work independently as it ought to be.
The fact that the Trump was on the heels of the Fed for keeping interest rates lows is seen as a headwind that could affect the agency’s ability to slow rate hike pace even when it is the best option. According to Larry Summer, who served in the Treasury department during Obama’s and President Bill Clinton’s administration, Trump needs to let the Fed do whatever it sees is good for the economy.
Independence has always been the hallmark of institutions such as the Fed in the U.S. However, with Trump at the helm, the same cannot be guaranteed. The commander in chief has shown that he is not in agreement with the policies which he believes will significantly affect White House efforts to spur economy growth.
It may be high time that he left the agency carry out its mandate as it has done in previous years without any political interference.
For Singaporeans, now may not be the time to look into U.S bonds especially with talk of two more interest rate hikes before the end of the year. Rising interest rates tend to be bad for bonds.
Given the current high interest rate environment, it may be time for people to look at stocks of companies that do most of their businesses in the U.S. Regional banks that do most of their businesses domestically are a perfect fit in this case as they are insulated from the negative effects of a strong dollar.