The Fed hiked rates nine times from late 2015 through 2018, but cut them twice in the past few months. That seems to have let Trump off the hook for his attacks on the central bank and the Fed Chairman, Jerome Powell—and just as investors were getting worried that the Fed was losing its independence.
But is he off the hook? No, he’s back at it again.
Last week, the Fed announced that it would take down its benchmark overnight lending rate to a target range of 1.75 percent to 2 percent.
It was enough for Trump. He wants rates slashed below zero—at a minimum. Nor did the Fed forecast another rate reduction this year, or rule it out, either.
So, Trump hit the Twitter waves, bashing the Fed and Powell as “bonehead” officials missing “a once-in-a-lifetime opportunity” to boost the economy with rate cuts.
Does it matter—these Twitter rants? Yes, as it turns out, they do when they come from the president.
A new study shows that his attacks on the Fed have indeed influenced the way traders view interest rate trends, as well as threatening the central bank’s independence.
The study, titled "Threats to Central Bank Independence: High-Frequency Identification with Twitter”, by Duke University and the London Business School claims to offers “market-based evidence that President Trump influences expectations about monetary policy”.
“Overall, we find strong evidence that the consistent pressure applied by President Trump to pursue more expansionary monetary policy is manifested in the market expectations of a lower target rate, forecasting a steady erosion in central bank independence over the course of his presidency,” the researchers wrote.
There isn’t exactly a consensus on this, though. Two recent Reuters polls had respondents saying they saw little impact on the Fed from Trump’s pressure.
Perhaps that’s wishful thinking. Related: Billionaire Hedge Fund Manager Bets On Looming Market Crash
Trump has been singularly focused on low-interest rates and handpicked Fed insider Jerome Powell as chairman. It rankled when Powell was clearly loyal to the institution of the Fed itself—not the president.
The Twitter campaign against Powell began in earnest in April, when Trump calling the Fed chairman “clueless”. More recently, he asked whether Powell or China’s president, Xi Jinping, was the U.S. “bigger enemy”.
Initially, the US administration, meaning Trump and his top economic adviser, Larry Kudlow, wanted the rate to be cut to around 2 percent. But more recently, Trump has decided he wants the Fed to lower interest rates to zero or below, which many financial experts oppose.
Central banks in Europe and Japan have set negative interest rates at times in recent years, nudged along by slow economic growth and low inflation.
This is the first time in U.S. history that a president has openly attempted to influence the Fed’s decisions, and it’s been unsettling to financial markets. Stocks dropped significantly the last time he attacked the Fed.
As the 2020 election draws closer, Trump is expected to intensify his attacks on the Fed, especially if economic growth shows signs of slowing, as his reelection is largely based on the economy.
By Fred Dunkley for Safehaven.com
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