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Is Trump Right About The Federal Reserve?

Trump

Trump told the Wall Street Journal on Tuesday that the Federal Reserve Bank was the “biggest risk” to the U.S. economy, and suggested that its Chairman, Jerome Powell, was going on an interest-rate-raising spree because it makes him “happy”.

It may not be Trump’s first public attack on the central bank, but it is the most vicious to date, and many will note that the American president is starting to sound a lot like Turkey’s unhinged Erdogan, who believes that interest rates are the work of the devil.

Speaking from the Oval Office, Trump also bemoaned the fact that Obama had zero interest rates, seemingly suggesting that the Fed chairman just doesn’t like him.

He took this much further than investor confidence would have liked, too, when he suggested that he might regret having appointed Powell in the first place. To that he simply said “too early to tell, but maybe”.

“Every time we do something great, he raises the interest rates,” Trump told the WSJ. “I’m very unhappy with the Fed because Obama had zero interest rates.”

The run-up to this was an interview last week with Fox News, wherein Trump also suggested that the Fed was threatening the economy, but that he was responsible for it: 

"I put him there and maybe it's right, maybe it's wrong but I put him there," Trump told Fox. Related: The Divide Between Italy And The EU Is Growing

From Trump’s perspective, the plan is a weak dollar that would boost exports and divert some of the blows from the trade war by giving him more leverage over negotiations. And inflation, to Trump’s mind, is not a risk of getting out of control.

The Fed’s current take on the economy is that GDP growth will hit 3.1 percent for the year, but I the long-term, that growth is expected to slow to 2 percent, and then further after 2021. With regard to unemployment, the Fed expects next year to see it at 3.5-percent, the lowest it’s been at any point since 1969.

Powell admits that the situation is precarious. In August, he said the risks were two-fold: 1) “moving too fast and needlessly shortening the expansion” and 2) “moving too slowly and risking a destabilizing overheating”.

For Trump, obviously, it’s moving too fast.

A president has never fired a Fed chairman before, and Trump has indicated that he has no intention of doing such, though recent comments have investors worried that he’s changing his mind.

By law, according to CBS, a president can remove a board member “for cause”; however, courts have previously ruled that the “cause” must represent something more concrete than policy disagreement between the two.

And everyone will note the dangerous similarity to Turkey, where President Erdogan has repeatedly referred to interest rate his as the work of the devil, resisting them entirely until very recently and even appointing his son-in-law to head the ministry of finance to give him control over the central bank. There’s nothing investors hate more than a central bank that is not independent.

Even when investors disagree with interest rate hikes, no one wants the president publicly bashing the fed.

Related: Stablecoins: The Next Trend In Cryptocurrencies

Investors are widely anticipating that the Fed will hike interest rates again in December, with Fed members noting during at late September meeting of the Federal Open Market Committee that “participants generally anticipated that further gradual increases in the target range for the federal funds rate would most likely be consistent with a sustained economic expansion, strong labor market conditions, and inflation near 2 percent over the medium term”.

And, even if subtly, the Fed is taking its own pots shots at Trump, noting that the general confidence in growth prospects also faces a few potential obstacles one fiscal policy stimulus starts to wear off.

The September meeting minutes noted that despite the prevailing optimism, “a number of contacts cited factors that were causing them to forego production or investment opportunities in some cases, including labor shortages and uncertainty regarding the trade policy”.

By Fred Dunkley for Safehaven.com

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