The Fed, in Donald Trump’s line of fire

It is the best interests of an independent central bank of make its policy choices as transparent as possible. It has been amply demonstrated that this reduces the volatility of the business cycle. In contrast, a central bank under the sway of political power creates uncertainty, which is negative for the spending decisions of economic agents.

In the US, the Fed’s independence is being questioned. To fill a vacant seat on the Fed’s board, Donald Trump has just chosen a candidate less on the basis of his competence than for his capacity to fulfil the president’s wishes. This is what’s known as putting the worm in the fruit.

There is always a reason to criticise a central bank, for what it does…or what it doesn’t do.
In the US, the Fed is accused of having caused all the country’s recessions due to an overly restrictive policy (all, might be something of an exaggeration) but also of having encouraged excessive leverage due to its too lax policy.
The QE programmes have been criticised as a major risk of the dollar’s depreciation and an unbridled spiralling of prices (which has not materialised). The halt of the QE programme in 2014 was supposed to trigger stock market collapse (which also did not happen). The exit from the zero interest rate policy was supposed to break the expansion phase (it continues apace, four years later). Recently, quantitative tightening has been credited with unleashing the financial turbulence of end-2018 (an assumption that does not hold up to close scrutiny).
In short, the Fed is the perfect scapegoat for investors who have made bad bets, for forecasters who have been wrong-footed… and for a president seeking to divert attention away from his own actions, which are highly questionable in trade and fiscal matters.
Donald Trump no longer just criticises Jerome Powell publicly, he tells him what he should do, in this case immediately cut the policy rates by 50bp. Why by 50bp, and not by 100 or 200bp, anyone’s guess!
The sycophants surrounding the US President repeat this demand across the media. It is legitimate to debate the Fed’s rate policy, but within the context of its mandate – which does not currently include the US President’s electoral considerations.
At this point, the Fed has halted its rate hikes and seems satisfied with a prolonged status quo. The money market is expecting an easing of monetary policy next year (chart lhs). The decision will be dictated by financial conditions (this is the Fed’s implicit mandate) and the trend in inflation.
Since 2012, the Fed has been lagging behind its inflation target of 2% per year. It has therefore initiated a reflection on possible adjustments to its strategy and communication. However, it has never been the Fed’s remit that it would take its orders directly from the White House.

Bruno Cavalier – Chief Economist, ODDO BHF
Fabien Bossy – Economist, ODDO BHF