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Is the Fed’s Independence Being Tested?

20 July 2018 by Eoin Walsh

Looking at the state of the Turkish economy since President Erdogan decided to meddle in the affairs of its central bank; with the Lira down about 20% vs the US dollar, inflation running at 15%, and the yield on the 10yr government bond running at almost 17%, you might be tempted to think that most leaders would stay well away from the subject.

Unless of course, you are President Donald J Trump. Apparently the two presidents had a long conversation at the NATO summit last week, maybe that’s just a coincidence; although, if you were one of the journalists publishing “fake news” or one of the judiciary who blocked his travel bans, you might just be getting a bit nervous!

To recap, in an interview with CNBC last night, President Trump said that he was “not thrilled” about the Fed raising rates, and suggested that the rate hikes were going against all the good work he was doing. He also said “I am not happy about it. But at the same time I’m letting them do what they feel is best”, which immediately raised questions about the President trying to influence the Fed’s political independence. It is the strength of the dollar that has put the Fed in the crosshairs, along with European and Chinese authorities (due to the weakness of their currencies), and fears of a currency war have once again been ignited as a cheap dollar would obviously help US exporters. However, we have always thought that the Fed simply do what they think is best to adhere to their mandate, the President “letting” this happen shouldn’t come into it.

What this means for the Fed’s current policy is unclear, in all reality it probably won’t have any impact. If anything, at the margin it will probably embolden the Fed to continue on their prescribed path, as set out by their Dot Plots, rather than be seen to be influenced by political interference. However, if there was still any doubt, it does seem clear that President Trump is happy to wade into any topic and, unlike previous presidents, is not concerned about encroaching on the impartiality of supposedly non-political institutions.

Since President Trump’s election in November 2016, there really haven’t been many dull moments; and although the summer holiday period for politicians is usually seen as a quiet time for political commentators, it doesn’t feel like that’s going to be the case this year.

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