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by Aleksandre Natchkebia on October 18th, 2018

Donald Trump vs The Federal Reserve

The central bank of a country is responsible for setting the monetary policy. The monetary policy, in turn, determines the economic climate. The tools which are at the disposal of the central bank have the capabilities to boost the economy in short-term at the risk of high inflation and adverse consequences in the long term. Similarly, the central bank can tighten the economy and lower the economic growth rate. For these reasons, to ensure that the central bank acts in the long-term interest of the country, they are usually independent from the governments. As governments care about their approval ratings and reelection chances, they might be incentivized to compromise long-term economic health for strong short-term growth figures. To avoid this problem, central banks operate independently and their decisions aren’t directed by the elected government. In the US, the Federal Reserve is an independent institution, although the president of the country still has the prerogative to assign or fire the chairman. This way, the leader of the country can still influence the decisions of the central monetary authority.

Donald Trump said the Federal Reserve is “going too fast”

Some are beginning to question president Trump’s remarks as an action to influence the behavior of the Federal Reserve. The Fed has been increasing the benchmark interest rate gradually after it was lowered to a little over 0% during the financial recession. Lowering the interest rate is one of the tools of the institution which makes borrowing cheaper and thus increases economic activity and stimulates growth in times of crises. Unfortunately, the rates can’t stay too low for a long time as the inflation might get out of hand. The Fed had been waiting for the inflation to pick up and as soon as it received the signs, it started to raise the rate little by little. This might not be in the best interest of the incumbent administration as the rate hike could mean a slowing growth.

Donald Trump vs The Federal Reserve

Donald Trump has publically criticized the decisions of the institution to raise the benchmark interest rate. He even called the Fed his “biggest threat” and said it was “ecause the Fed is raising rates too fast. And it’s independent, so I don’t speak to him.” By ‘him’, Trump referred to Fed Chairman Jerome Powell. “But I’m not happy with what he’s doing because it’s going too fast. Because – you look at the last inflation numbers, they’re very low. I’m not blaming anybody, I put him there. And maybe it’s right, maybe it’s wrong. But I put him there,” – he added. In turn, the representatives from the institution have said that the economic climate is just right for increasing the rates as the latest reports from the Labor Department show strong employment data. The number of job openings in the United States has increased to 7.1 million in August and the unemployment rate was down to 3.7% in September. That is the lowest the indicator has reached in 50 years.

People came to the defense of the Federal Reserve and emphasized the importance of maintaining the independence of the institution

Mark Carney who is the governor of the Bank of England understands the position of Jerome Powell very well as he is tasked with a similar responsibility in the UK. Carney came to Powell’s support in an interview as he said that the latter “is an individual that really understands the plumbing of the U.S. and global financial systems.” Christine Lagarde, the managing director of the International Monetary Fund also commented on the issue. “He comes across and members of his board as extremely serious, solid and certainly keen to base their decisions on actual information and the desire to communicate that properly,” – she said.

Donald Trump vs The Federal Reserve

Alan Greenspan, a legendary Fed Chairman who served under four different presidents from 1987 to 2006 said that it was all too common during his years as well to receive recommendations or insight from the president. “You’ll find every president has an insight into how the markets work and where interest ought to be, which is always superior to that of the Federal Open Market Committee,” – he said. To the Fed officials, he suggested not to listen to the criticism and keep making independent decisions. “The best thing that you can do if you’re in the Fed is put earmuffs on and just don’t listen. I was at the Fed for 18 and a half years. I got innumerable notes, pledges, requests, etc. to lower rates. I do not recall a single instance where somebody in the political realm said we need to raise rates, they’re too low,” – he said suggesting that the criticism of Fed’s policies are mostly motivated by the fear of slowing growth. Greenspan Also weighted in on the discussion of Jerome Powell’s competence commenting: “Jay Powell is a first rate Federal Reserve chairman. This guy knows what he’s doing. I’ve known him for years. He’s extremely competent. His competence is such that I don’t worry about where the Fed’s going.”

The notes released from the FOMC meeting show no signs of wavering from the Fed officials

The Federal Open Market Committee met in September to discuss the monetary policy of the country. The committee voted unanimously for a rate hike of 0.25% and there are signs of more increases coming in the near future. The Fed believes that regardless of the criticism from the administration, increasing the benchmark rate is still the best policy. “With regard to the outlook for monetary policy beyond this meeting, 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,” – read the notes released from the meeting.

Although Trump wasn’t mentioned directly during the meeting, the committee still discussed the policies of the incumbent emphasizing the risk they pose to the economic growth. “Despite this 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 trade policy. In particular, tariffs on aluminum and steel were cited as reducing new investment in the energy sector. Contacts also suggested that firms were attempting to diversify the set of countries with which they trade – both imports and exports – as a result of uncertainty over tariff policy,” – read the minutes.

By Aleksandre Natchkebia

Aleksandre Natchkebia is a graduate of Cornell University with a degree in economics. He has been actively writing articles on global economic issues on various online platforms and print media since 2011. Aleksandre joined the Forexnewsnow team in 2018 as a writer on business and financial markets.

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