One of the most controversial features of President Donald Trump’s second period is his gracious criticism of the Federal Reserve (Fat) Chairman Jerome Powell to maintain raised interest rates – an attitude that Trump claims is unnecessarily expensive for the US economy.
But this is more than just rhetoric. Trump is trying aggressively to undermine Fed’s board of directors and threatens an institution that is long known for its political independence. Ironically, this is a lot of attack that is left, and elaborates what Trump and others describe as a fed “behind the curve” potentially leads to a deeper sale in the US dollar.
“Political pressure makes it difficult to credibly switch to an overtly Dovish foothold. It leaves the policy data (thus late) rather than preventative. It’s bad for the USD, “The Market Insight Team at Lloyds Bank led by Nicholas Kennedy, said in a note to clients on September 18.
Trump’s attack on bold
Last Thursday, a new chapter in Trump’s campaign against the central bank marked as his administration took the unprecedented step to the US Supreme Court to allow the firing of the Federal Reserve Governor Lisa Cook. This would be the first forced removal of a sitting fed governor since the founding of the institution in 1913.
The move followed a temporary court block issued by US district judge Jia Cobb, who prevented the extinction of Cook, a Biden appointment, pending further lawsuits.
According to Lloyds Bank Market Insights team, such attacks are likely to rise when Powell enters the last months of its term as chairman. Trump’s recent appointed at Fed, Stephen Miran, is already calling for cuts in quick fire and wants the bank to reduce benchmark loan costs by 50 basic points at the recently completed meeting.
Behind the basket
In his core, Trump’s campaign reflects a desire for a fed more responsive to his economic worldview, which requires Ultra-Lave to bet about 1%, which is significantly down from the current 4%.
Trump has claimed that the current rates keep priority costs insurmountably high for many Americans, hinder home ownership and introduce billions into unnecessary debt refund expenses. He frames this as a staggering miss the possibility of an otherwise “phenomenal” economy. Meanwhile, many economists agree that the rates remain too high given signs of debilitating labor markets and consumer health.
Thus, Federal Reserve is widely perceived as “Behind the Curve” – a technical expression that means it is too slow to reduce the rates in response to developing economic conditions.
Still, Trump’s insistence on forcing faster cuts at the risk of pushing fat further behind this curve.
Damn if they do, cursed if they don’t
Imagine keeping the reins from the world’s most powerful central bank, not only responsible for the world’s largest economy, but the fate of the global reserve currency, USD. Now imagine the political pressure to reduce the rates quickly against fear of acting politically compromised. This leaves decision makers cursed if they act and curse if they do not.
So, unlike typical decision makers that are adjusted with measured tranquility in response to data, Powell and his colleagues are now working under intense political pressure and public control from the White House. They face a classic catch-22: face accusations of bent to political pressure in case of quick tights of tight (even if they do it independently); Wait too long and risk the potential elaboration of an economic slowdown.
This dynamic could breed reflexive stubbornness. To avoid accusations of the capital of political pressure, bold instinctively lean towards caution – wait longer and keep the rates elevated. However, this posture can aggravate the problem: Delayed speed cuts keep monetary policy out of synchronization with financial conditions, just as a patient who resists mild medication only to demand drastic doses when a fever spikes.
The subsequent high doses of speed cuts could be interpreted by markets as a sign of panic, leading to increased volatility in the financial markets, including cryptocurrencies.
Dollar in danger
The Catch-22 situation could also weigh the US dollar, a bullish development for dollar-denomined assets like gold and bitcoin.
The dollar index, which measures Greenback’s value against larger currencies, has dropped almost 10% this year to 97.64. Meanwhile, Bitcoin’s price is assembled by 24% to $ 115,600.
