The Dollar has weakened by one percentage point versus both the Euro and Sterling, and is broadly lower against a range of other currencies, following criticism of the Fed’s policy by President Donald Trump.
In an interview with Reuters yesterday, Trump said he was “not thrilled” with Jerome Powell for raising rates, and said he should be supporting him in boosting the economy – especially since other countries’ central banks were providing accommodative monetary policies.
After two hikes this year, U.S. interest rates are around 1.9%. Moreover, the Federal Reserve has signalled it intends to raise them a further two times, with the result that the market has now priced in a September increase with 92% probability. The increase in rates, combined with the boost to growth from Trump’s fiscal stimulus that lifted annualised GDP above 4% in the second quarter, has resulted in the Dollar rallying to its highest levels in over a year against its major counterparts. Meanwhile, it hasn’t escaped the president’s notice that the Chinese Yuan, which is managed by the Chinese central bank has fallen over 6% in the past month. “I think China’s manipulating their currency, absolutely. And I think the euro is being manipulated also.”
This isn’t the first time the president’s own nomination for Fed chair has come in for criticism over higher borrowing costs. But as a result of his recent behaviour in other policy areas – namely trade – there are now genuine concerns that his next fight could be with the Fed. Aside from the undoubted disquiet that Trump’s very public criticism of the independent central bank’s policy decisions will generate among US lawmakers, the major unknown is how Jerome Powell and the Fed will respond. We should get a sense from his speech this Friday at the Jackson Hole Symposium. Our best guess is he will choose to ignore Trump’s noise and get on with the job in hand as planned. After all, the Fed has highlighted that while the Trump administration’s trade policy is a potential risk to the economy, it would only prompt them to slow or pause their policy tightening if it started to dampen growth. That to me puts them on different sides of the fight to an extent, so it’s hard to make the case for the Fed enabling such actions as Trump suggests.
So perhaps the biggest consideration should be how a man – known to be accustomed to getting his own way and not known for diplomacy or respecting well-established institutions – will respond to being ignored; or worse still, being challenged.
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