One of the most controversial characteristics of President Donald Trump’s second term is his incessant criticism of the federal reserve (Fed) President Jerome Powell to maintain high interest rates – a position argues that Trump is unnecessarily expensive for the American economy.
But it is more than a simple rhetoric. Trump aggressively tries to undermine the Fed Board of Directors, threatening a known institution for a long time for its political independence. Ironically, this very assault may turn against, deepening what Trump and others describe like a Fed which is “behind the curve”, potentially leading to a deeper sale in the US dollar.
“Political pressures make it difficult to crediblely pass to an sole openly endowed. This leaves political data (So late) Rather than preventive. It’s bad for the USD, “said the Lloyds Bank Market Insights team led by Nicholas Kennedy, in a note to customers on September 18.
Trump’s attack on the Fed
Last Thursday marked a new chapter of Trump’s campaign against the central bank, while its administration has crossed the unprecedented measure to petition the Supreme Court of the United States to allow the dismissal of the governor of the Federal Reserve Lisa Cook. This would be the first forced dismissal of a governor of the Fed in office since the Institution’s foundation in 1913.
This decision follows a temporary judicial block issued by the American district judge Jia Cobb, who prevented the escape from Cook, a named Biden, pending new legal proceedings.
According to the Lloyds Bank Market Insights team, these attacks should increase as Powell is entering his mandate as president in the last months. Trump’s recent named to the Fed, Stephen Miran, is already calling for rapid rate drops and hopes that the bank reduces the 50 -point reference loan cost at the recently finished meeting.
Behind the curve
Basically, Trump’s campaign reflects the desire for an influence more sensitive to its economic vision of the world, which requires ultra-basic rates around 1%, down considerably compared to the current 4%.
Trump argued that current rates maintain prohibitive mortgage costs for many Americans, hindering ownership of ownership and imposing billions of unnecessary debt refinancing expenses. He displays this as a breathtaking missed opportunity on a differently “phenomenal” economy. Meanwhile, many economists agree that rates remain too high given the signs of weakening the labor and health markets of consumers.
Thus, the federal reserve is largely perceived as “behind the curve” – a technical term signifying that it is too slow to reduce rates in response to the evolution of economic conditions.
However, Trump’s insistence on forcing faster risk rate reductions pushing the Fed more behind this curve.
Damned if they do it, damn if they do not
Imagine holding the reins of the most powerful central bank in the world, responsible not only for the greatest economy in the world, but for the fate of the global reserve currency, the USD. Now imagine the political pressure to quickly reduce rates, against the fear of appearing politically compromised. This leaves that political decision -makers act if they act and damned if they do not.
Thus, unlike typical decision -makers who adapt to calm measured in response to data, Powell and his colleagues now operate under intense political pressure and a public examination of the White House. They are faced with a classic wrestling: the face accusations to succumb to political pressure in the event of rapid reductions (even if they do it independently); Wait too long and risk the potential deepening of an economic slowdown.
This dynamic could reproduce reflexive stubbornness. To avoid the accusations of capitulating at political pressure, the Fed can instinctively lean towards caution – waiting for longer and maintain high rates. However, this posture can exacerbate the problem: delayed rate cuts prevent monetary policy from synchronizing with economic conditions, just like a patient with light drugs only to require drastic doses once a fever increases.
High doses of reducing subsequent rates could be interpreted by markets as a sign of panic, leading to increased volatility on the financial markets, including cryptocurrencies.
Risky dollar
The wrestling situation could also weigh on the US dollar, bullish development for dollar assets like gold and bitcoin.
The dollar index, which measures the value of the greenback against the main currencies, fell by almost 10% this year to 97.64. Meanwhile, the price of Bitcoin joined 24% to $ 115,600.
