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The Federal Reserve Shows Indifference to Pressure From the White House to Cut Interest Rates

US Federal Reserve

The Federal Reserve Shows Indifference to Pressure From the White House to Cut Interest Rates

The US Federal Reserve System has ignored pressure from the Trump administration and financial market forecasts to execute an interest rate cut of 0.5 percent after Jerome Powell, the Fed Chairman, on Tuesday 25th of June, told the Council on Foreign Regulations that “the Fed is insulated from short-term political pressures, what is often referred to as our independence. Congress chose to insulate the Fed this way because it had seen the damage that often arises when policy bends to short-term political interests. Central banks and major democracies around the world have similar independence.”

Click here to watch the full debate between the Fed Chairman Jerome Powell and New York Times’ Neil Irwin.  

On the 24th of June President Trump tweeted: ‘despite a Federal Reserve that doesn’t know what it is doing – raised rates far too fast (very low inflation, other parts of world slowing, lowering & easing) & did large scale tightening, $50 Billion/month, we are on course to have one of the best Months of June in US history. Think of what it could have been if the Fed had gotten it right. Thousands of points higher on the Dow, and GDP in the 4’s or even 5’s. Now they stick, like a stubborn child, when we need rates cuts, & easing, to make up for what other countries are doing against us. Blew it!’

US Federal Reserve

Mr. Powell said that the Federal Open Market Committee (FOMC) was deliberating whether interest rate cuts were appropriate during a period of heightened geopolitical tensions, increasing tariffs from the trade war with China, and recent conflicts with Iran spurring unease throughout the financial markets and raising the price of crude oil and gold.  

James Bullard, the Federal Reserve Bank of St. Louis’ CEO, in an interview with Bloomberg TV said:

“Just sitting here today I think that 50 basis points would be overdone. I don’t think the situation really calls for that, but I would be willing to go 25 basis points. I hate to prejudge meetings, things can change by the time you get there but if I was just going today that is what I would do. The economy is expected to slow down to something below 2 percent in the second half of the year; that isn’t the end of the world, inflation is running low, inflation expectations are running low, so we would like to push those up toward 2 percent. I don’t think we have to take huge action in order to get this. This is in the realm of insurance and ordinary adjustments to monetary policy that should be made to be sensitive to market developments.”  

During a meeting last week, the Fed kept interest rates unchanged whilst hinting at cuts that could take effect next month.

Financial market traders and investors have forecast interest rate reductions despite the Federal Reserve’s suggestion that a cut could be damaging to the economy as the labor markets and price of assets remained positive.

US market indexes fell after the Fed Chair’s comments, whereas Treasury bonds rose slightly. The USD also benefited from the statement rising briefly. Investor sentiment has remained resilient forecasting an imminent interest rate cut.

The Federal Open Market Committee is scheduled to have a meeting at the end of July. Meanwhile, Fed officials will be paying close attention to the economic indicators and reports that could give a good insight into how the US economy is performing. Similarly, the Federal Reserve’s policymakers will also be vigilant of the G20 summit in Japan, where President Trump is expected to meet with China’s President Xi to resume talks regarding tariffs and the ongoing trade war. Both Presidents have been trying to reach an agreement that would bring the tariff war to a swift conclusion, but a breakdown of those talks has led to even more levies which have rattled the financial markets once again. President Trump has previously threatened to impose tariffs on all imports from China unless common ground can be found that would safeguard US intellectual property.

Jerome Powell, the Fed Chair, has pointed out that, for the time being, the flurry of tariffs have not damaged the growth of the US economy, but the pressure from trade disputes and the threat of tariff hikes may cripple the financial markets. The Federal Reserve has concerns surrounding its 2 percent inflation rate target that could influence a key driver of inflation which is consumer spending.

President Trump piled on the pressure on the Federal Reserve Chairman, Jerome Powell, to cut interest rates.

President Trump suggests that the gap between the US dollar and the euro is expanding too wide which can be fixed by lowering the rate of interest. Various legal advisors have said that the process of getting rid of or demoting Powell could be very time consuming and difficult, therefore making it unlikely that President Trump would go ahead with such a threat.

“The challenges of monetary policymaking have changed in a fundamental way in recent years. Interest rates are lower than in the past and likely to remain so. The persistence of lower rates means that when the economy turns down interest rates will more likely fall close to zero; their effective lower bound or ELB. Proximity to the ELB poses new problems to central banks and calls for new ideas.”

“The global risk picture has changed in just 6 to 8 weeks, and it is around trade developments and concerns about global growth. Our focus is looking forward through the windshield at what the right setting is for monetary policy going forward to achieve our goals.”  

Click here to watch the full discussion.

Stock prices plummeted as the US dollar pushed upwards on June 26th after statements from the Federal Reserve stifled hopes that the FOMC would introduce cuts to interest rates as soon as next month.  

With US-Iran tensions building, the price of gold dropped by over 1 percent, the RBNZ (Reserve Bank of New Zealand) left interest rates at an all-time low of 1.5 percent, propping the New Zealand dollar up slightly. The increase was short-lived however because the RBNZ then revealed its uneasiness with the political tensions between major countries that threaten the integrity and future growth of the global economy.  

The Chief Business Economist at IHS Markit, Chris Williamson suggests that the business sentiment and labor market are weakening amidst the geopolitical tensions and trade disputes across the planet.

“Business activity edged closer to stagnation in June, expanding at the slowest rate since February 2016 and rounding off a second quarter in which the survey data point to the pace of economic expansion slipping to 1.4%. Recent months have seen a manufacturing-led downturn increasingly infect the service sector. The strong services economy seen earlier in the year has buckled to show barely any expansion in June, recording the second-weakest monthly growth since the global financial crisis.”

“Prices for goods and services meanwhile rose at a slightly increased rate in June, mainly due to tariffs. To illustrate, some two-thirds of all manufacturers attributed some or all of their raw material cost increases to tariffs during the month. However, the inflationary impact of tariffs was offset by a broader softening of demand, which reduced suppliers’ pricing power. The overall rate of input cost inflation in manufacturing eased to a two-year low, while average selling prices for goods and services showed one of the smallest rises seen since late2016.”

Click here to read the full report.