Federal Reserve Faces Criticism Again as US Economy Misses President Trump’s Targets
The dispute between the US Central Bank and the President continues. The Fed and President Trump go head to head again as the Federal Reserve is held accountable by the Trump administration for risking the overall growth and health of the economy whereas reports indicate that the US economy is in a ‘reasonably good’ condition as Jerome Powell claimed.
However, behind the conflict between the bank and the administration stands a threat which could undermine President Trump’s 2020 reelection campaign.
‘Reasonably good’ comes as a stark contrast to what the US President vowed to deliver throughout his leadership campaign, and as things stand he is moving towards a reelection without the major economic targets he had promised to cultivate which could etch away at his chances of a second term in office.
Economic growth is dwindling and falling short of the 3 percent yearly rate he pledged his time in office would deliver. With the trade deficit deepening, the trade war with China showing no signs coming to a resolution any time soon, President Trump’s promises seem to be suspended in thin air.
Job growth is on the rise, with monthly figures showing an increase. However, this has been the case for almost a decade, prompting some critics to believe that the highest rates of expansion may be at an end as economic activity hovers near a 2 percent mark for yearly growth.
“As your President, one would think that I would be thrilled with our very strong dollar. I am not! The Fed’s high interest rate level, in comparison to other countries, is keeping the dollar high, making it more difficult for our great manufacturers like Caterpillar, Boeing John Deere, our car companies, & others, to compete on a level playing field. With substantial Fed Cuts (there is no inflation) and no quantitative tightening, the dollar will make it possible for our companies to win against any competition. We have the greatest companies in the world, there is nobody even close, but unfortunately the same cannot be said about our Federal Reserve. They have called it wrong at every step of the way, and we are still winning. Can you imagine what would happen if they actually called it right?”
Some experts have suggested that the conflict between the Fed and Trump is down to the central bank’s take on tackling monetary policy with an eye on long-term solutions whereas President Trump has a more short-term agenda in that he wants to fulfill his 2016 campaign promises before the 2020 presidential elections.
What are the Federal Reserve’s objectives when outlining monetary policy?
‘The Congress established the statutory objectives for monetary policy–maximum employment, stable prices, and moderate long-term interest rates–in the Federal Reserve Act.’
‘The Federal Open Market Committee (FOMC) is firmly committed to fulfilling this statutory mandate. In pursuing these objectives, the FOMC seeks to explain its monetary policy decisions to the public as clearly as possible. Clarity in policy communications facilitates well-informed decision-making by households and businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society.’
These objectives that the Federal Open Market Committee is strongly committed to executing, are at times different to and often jar with the economic and political agendas of the administration in office. This could include optimizing annual expansion, utilizing leverage in a trade dispute, such as the grueling trade war with China, or lowering interest rates to undermine forecasts and increase investment levels.
On the one hand, a decline in the rate of interest can elevate the economy by spurring consumers and companies to invest, borrow and spend more money. On the other hand, this can simultaneously bring about financial surpluses and inflation.
The increasing pressure on the Federal Reserve by President Trump, to cut interest rates in order to boost the growth of the world’s largest economy, comes at a time when unemployment figures are at record level lows. The President justifies his demands with reasoning such as supporting unstable financial markets, to encourage economic expansion, and to gain an advantage in the ongoing trade war by lowering the value of the dollar. President Trump voiced his disapproval of the Fed’s handling of the monetary policy as he told reporters on the 30th of July:
“The Fed moved, in my opinion, far too early and far too severely. It puts me at somewhat of a disadvantage, fortunately I have made the economy so strong that nothing is going to stop us, but the Fed could have made it a lot easier. I would like to see a large cut and I would like to see immediately the quantitative tightening stopped; it should be stopped. For them to have done quantitative tightening and also higher interest rates simultaneously I think was a big mistake.”
“I also think that had they not done it, as good as we’ve done, we’ve set a record as you will say in the stock market. We have the all-time high in the history of the stock market; I think I would have been 10,000 points higher. President Obama had zero interest rate; we have normalized interest rates. With zero interest rates anything happens and yet we still blew his economy away. I’m very disappointed in the Fed, I think they acted too quickly by far and I think I’ve been proven right. The Fed is often wrong.”
To watch President Trump’s full statement about the Fed’s abrupt decision to trigger quantitative tightening and increase the rate of interest click here.
The US economy is moving along regardless of the pressures from the trade war, but the rate of growth remains under the targets set by Trump’s 2016 campaign promises. Trade talks with Chinese officials have dampened expansion levels as the trade deficit stays high. With his sights set on the 2020 reelection campaign, President Trump is urging the Fed to ramp up its efforts to support the economy. But are Trump’s demands falling on deaf ears?
On the 31st of July, President Trump tweeted: “What the Market wanted to hear from Jay Powell and the Federal Reserve was that this was the beginning of a lengthy and aggressive rate-cutting cycle which would keep pace with China, The European Union and other countries around the world. As usual, Powell let us down, but at least he is ending quantitative tightening, which shouldn’t have started in the first place – no inflation. We are winning anyway, but I am certainly not getting much help from the Federal Reserve!”
Jerome Powell, the Fed’s Chairman, was appointed by President Trump himself to lead the US central bank throughout his presidency. In response to the continuous criticism, Powell said:
“Over the past few months, we’ve seen some crosscurrents and conflicting signals about the outlook. We believe we can best support the economy by being patient before making any future adjustment to policy. The only thing we care about at the Fed is doing our job for the American people and using our tools appropriately. That is very strongly our culture, we’re never going to take political considerations into account or discuss them as part of our work.”
Quotation taken from an article by the Washington Post. Click here to read the full article.
The Fed’s FOMC has actually tweaked its monetary policy slightly because of fears that backlash from the trade disputes with China and the European Union could be greater than forecast, and because of concerns that its own calculations were slightly off in terms of setting the appropriate rate of interest to suit the condition of the US economy.