Market Reacted Positively To Trump’s Tweet To Feds For Lowering Interest
President Trump has often attacked the U.S. Fed for not lowering interest rates. Lowering of interest rates would give a boost to the American economy. Trumps repeated tweets have altered market expectations towards significantly reduced interest rates. Market reactions influence the Federal Reserve’s decision making. The U.S. Fed’s insistence of immunity against the President’s bullying is not standing firm.
The Economic Research Bureau conducted its research and published a paper on Monday. The conclusion is that Trump is bullying the Fed to enforce the policy decisions that he wants. Researchers from Duke University authored the paper jointly with peers from London Business School. According to the research, investors believe that the Federal Reserve will bow down to the political pressure from the U.S. President. This is a risk to the independence and autonomy of the central bank.
The Fed has been designed and empowered to take decisions independently. Political interference in the short-term should ideally not affect the decision making of the Fed. This provides the central bank to make decisions it feels are best for the nation’s economy. History indicates that central banks which bend under political pressure are unable to contain inflation rates in the country.
Chairman of the Fed Jerome Powell has been criticized directly by the President. Trump compared Powell to a golfer who can’t putt. The President went to an even greater extent and said that Powell was a bigger enemy than Chinese President Xi Jinping.
Former President of Minneapolis Fed said that Trump intends to have someone to blame if the economy goes south. He is building the case for his voters, said Narayana Kocherlakota.
The researchers analyzed the futures data seconds after Trump’s tweets. The analysis says that these tweets are affecting market expectations for a cut in interest rate. Even though the estimated expectation by investors is ten basis points, it is significant because the Fed changes the rates by 25 basis points.