One of the most controversial features of President Donald Trump’s second term is his incessant criticism of the Federal Reserve (FED) Chairman Jerome Powell for maintaining high interest rates – a stance that Trump focuses on is not necessarily expensive in the American economy.
But this is more than just rhetoric. Trump is aggressively trying to break the Fed board, which threatens a long -term institution known for political freedom. Especially, this very attack returns to backfiring, deepening what Trump and others described as a fed “behind the curve,” which potentially leads to a deeper sale-off to the US dollar.
“Political pressures make it tough in credentials transition to an over -discipline. That leaves a policy data driven (so late) rather than pre-emptive. That’s bad for the USD, “the Market Insights team at the Lloyds Bank led by Nicholas Kennedy, told a note to clients on September 18.
Trump’s attack on Fed
Last Thursday, a new chapter was marked in Trump’s campaign against the Central Bank, as his administration has taken the unmistakable step of petitioning the US Supreme Court to allow federal reserve governor Lisa Cook. This was the first forced removal of a seated Fed governor from the establishment of the institution in 1913.
The step followed a temporary judicial block issued by US District Judge Jia Cobb, who prevented the ouster of Cook, an appointment of Biden, waiting for further legal trial.
According to the Lloyds Bank Market Insights team, attacks will likely increase as Powell enters the last month of his term as chairman. Trump’s recent appointment with Fed, Stephen Miran, is calling for a rapid reduction in fire rate and wants the bank to reduce the benchmark borrowing cost by 50 basic points at the recently finished meeting.
On the back of the curve
In the main, Trump’s campaign reflects a desire for a fed more responsive to his economic view of the world, demanding ultra-low rates around 1%, significantly from the current 4%.
Trump argues that current rates maintain mortgage costs that are prohibited for many Americans, preventing home ownership and billing -billions of unnecessary debt refinancing costs. He will make it a tedious misunderstanding in an otherwise “wonderful” economy. Meanwhile, many economists agree that the rates remain highly provided signs of weakening of consumer labor and health markets.
Thus, the Federal Reserve is widely seen as “behind the curve” – a technical term which means too slow to cute rates in response to emerging economic conditions.
However, Trump’s forcing the faster rate of reduction in the risks that drives the fed beyond the back of this curve.
Cursed if they do, damn it if they don’t
Imagine holding the rocks of the strongest central bank in the world, responsible not only for the world’s largest economy, but the fate of global currency reserve, the USD. Now think of political pressure to disrupt the rapid rates, against the fear that has emerged in the politics that are compromised. Policy manufacturers leave it if they act and cursed if they do not.
Thus, unlike the typical policy manufacturers who adjust to the measured calm in response to the data, Powell and his colleagues are now operating under severe political pressure and public investigation from the White House. They face a classic catch-22: faces of accusations that give up political pressure in case of rapid rate of rate (even if they do it independently);;;;;;;;;;;;;;;;;;;;;;; Wait too long and risk the potential deepening of a slowing down economy.
This dynamic can be a reflexive stubbornness. To prevent capitulate accusations at political pressure, the Fed can be naturally lean towards caution – waiting longer and retaining the rates. However, this posture may exacerbate the problem: delayed reduction rates maintain financial policy without syncing with economic conditions, such as a patient who is resistant to mild drugs only to require a violent dose once a fever spike.
The subsequent high dose of rate cuts can be interpreted by markets as a sign of panic, leading to increased volatility in financial markets, including cryptocurrencies.
Dollars at risk
The Catch-22 situation can also weigh in the US dollar, a bullish development for dollar denomination assets such as gold and bitcoin.
The dollar index, which measures the value of the greenback against major currencies, dropped nearly 10% this year to 97.64. Meanwhile, bitcoin prices rallied 24% to $ 115,600.
