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Has the Fed been 'Trumped'?

12 July 2019

Last week the President of Turkey dismissed his Central Bank governor, Murat Cetinkaya. President Erdogan blamed the governor for the rise in inflation and reportedly gave him the option to cut interest rates or resign. Both options were refused by Cetinkaya and he was removed from his position. President Trump may be wishing he could do the same, but the Federal Reserve (Fed) is independent and to remove the chair once appointed is very difficult.

Trump's frustration with the Fed is extremely high given his lack of control on their policy decisions, which is obvious from reading his recent tweet:

"Had the Fed not mistakenly raised interest rates, especially since there is very little inflation, and had they not done the ridiculously timed quantitative tightening, the 3.0% GDP, & Stock Market, would have both been much higher & World Markets would be in a better place!"

This week Chairman of the Fed, Jerome Powell, all but confirmed that they will reduce rates at the July meeting. For months President Trump complained bitterly about the Fed tightening and, as he sees it, the resulting strength of the US Dollar. Trump has openly said he regrets appointing Powell and explored the possibility of removing him from his post. Is the move to reverse the tightening a sign that Trump is getting the upper hand?

The actions of the Fed should reflect expected changes in the US economy. Therefore, their decision making process should not be influenced by Trump's interventions. On the other hand, some of President Trump's words and actions are contradictory. Trump's tax changes encouraged the repatriation of profits, which is positive for the dollar. His international trade policy is aimed at reducing the trade deficit, also supporting the dollar. Trump also talks about the "great" US economy: if it is doing that well, then we should expect the Fed to normalise rates. In practice, the US economy has been showing signs of weakening. The Fed appears to be responding to the slowing economy rather than caving into Trump's pressure. Following tariff changes, the Fed hoped that there would be an increase in capital investment but this has failed to materialise, which could be explained by the uncertainty surrounding the future of Trump's trade policy.

It appears that Trump's political strategy is to blame the Fed for an economic slowdown and to take credit if it gains momentum. Whilst he cannot remove Jerome Powell as chair, Trump can propose new appointments to the Fed and at present, there are two vacancies he is looking to fill. His initial proposals for these open seats were considered unconventional and ended in disaster as their baggage proved toxic. When considering the latest pair of candidates, Trump allegedly asked about their attitude to the strong dollar. However, the Fed is mandated to promote the goals of maximum employment, stable prices and moderate long-term interest rates.

The labour picture remains healthy with the unemployment rate close to its lowest level over the past forty years. Stable prices are targeted at 2% inflation and the Fed's preferred measure of Core Personal Consumption Expenditures was close to 2% last year, but has since dropped back to 1.6%. In terms of cutting rates, the Fed is looking at signs of a slowing global economy, citing trade frictions as a headwind.

Trump's erratic trade policy may prove to have a greater influence on the trajectory of the US economy than interest rates. A swift resolution to these rifts may encourage stronger growth in years to come, which may in turn encourage the Fed to raise rates again. However, as it stands, the Fed proclaims to be loosening policy in response to slower growth. For now, we expect the Fed will continue to respond to changes in the US economy rather than to Trump's tweets, even if he claims a victory.

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