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Donald Trump\u2019s assertion that he has a \u201cbetter instinct\u201d for setting interest rates than the Federal Reserve or its chairman does not appear to have weakened the dollar in the international currency markets.<\/p>\n
Markets appear doubtful that Trump could undermine the Fed\u2019s independence should he be elected, believing the former president either would not or could not succeed with the plan.<\/p>\n
Trump\u2019s demand for an unofficial seat at the policy-setting table conjured up comparisons in the market to Richard Nixon\u2019s influence over Fed chair Arthur Burns. Considered by many to be the\u00a0worst leader in the Fed\u2019s history<\/a>, Burns presided over the period of stagflation\u2014high inflation and low growth\u2014in the 1970s in part because, historians say, he was too weak to stand up to the White House.\u00a0<\/p>\n \u201cNixon [\u2026] strongly influenced then Federal Reserve Chair Burns,\u201d warned UBS Global Wealth Management chief economist Paul Donovan in a research note<\/a> to\u00a0clients on Friday.<\/p>\n Yet the U.S. dollar index, which tracks the performance of the world\u2019s reserve currency versus a basket of peers, has shown little sign of weakness as yet. Following three straight days of gains, it was broadly flat at 103.19 points in early trading.<\/p>\n \u201cInvestors seem to have been inclined to dismiss Trump policies with more extreme economic outcomes as a case of the former president not being serious,\u201d Donovan added. \u201cIf there were evidence that Trump\u00a0were\u00a0<\/em>to be serious about these policies, markets would probably react.\u201d<\/p>\n Already during his presidency, Trump was an active, vocal and repeated critic of Fed chair Jay Powell. But his comments on Thursday at a press briefing are a clear sign that he has more forceful action in mind.<\/p>\n \u201cI feel the president should have at least [a] say in there,\u201d he told reporters at his Mar-a-Lago residence. \u201cI think I have a better instinct than, in many cases, people that would be on the Federal Reserve, or the chairman,\u201d he argued since he \u201cmade a lot of money\u201d.<\/p>\n This follows a story published by the\u00a0Wall Street Journal<\/em>\u00a0in April stating Trump wants to be\u00a0consulted<\/a>\u00a0prior to the Fed\u2019s FOMC setting interest rate policy, a report that his campaign had downplayed at the time.<\/p>\n Central bank independence is considered sacrosanct for modern industrial economies\u2014as important a check and balance when running the economy as the separation of powers between the three branches of the U.S. government.<\/p>\n Even a hint of these lines blurring can be detrimental, one reason why the Fed\u00a0assiduously avoids<\/a> commenting on the dollar\u2019s exchange rate, which falls under the purview of the U.S. Treasury. A recent prime example of controversy involves former Fed chair Janet Yellen, Biden\u2019s cabinet secretary in charge of the government purse strings.<\/p>\n Last month noted economist Nouriel Roubini accused her of \u201cusurping core functions of the Federal Reserve\u201d and undermining its restrictive monetary policy\u00a0ahead of the November election<\/a>\u00a0by engaging in a kind of\u00a0backdoor quantitative easing<\/a>.<\/p>\n Through a shift that favors issuing more short-duration bills at the expense of benchmark 10-year bonds, he argued, Yellen artificially shrank supply of the latter, driving down yields on the long end of the curve.\u00a0<\/p>\n Not only does this benefit the housing market, he believed the effect is equivalent to that of a stealth interest rate cut\u2014a claim Yellen was\u00a0forced to deny<\/a>\u00a0amid Republican outcry.<\/p>\n Trump: I think the US president should have a say in Fed actions <\/p>\n Blond Erdogan<\/p>\n \u2014 Rag\u0131p Soylu (@ragipsoylu) August 8, 2024<\/a><\/p><\/blockquote>\n It\u2019s not hard then to imagine the kind of damage that can be done were the head of state to directly and forcefully intervene in monetary policy. In fact there\u2019s already plenty of evidence.\u00a0<\/p>\n Turkey\u2019s Recep Tayyip Erdo\u011fan repeatedly mismanaged his currency by sacking central bank governors who pushed for rate hikes. Turning conventional wisdom on its head<\/a>, the Turkish president argued only low borrowing costs could combat spiralling consumer prices.<\/p>\n Official inflation hit 75% for the month of May<\/a>, though it has eased since.\u00a0<\/p>\n Upon learning of Trump\u2019s plan to encroach upon the Fed\u2019s independence, the\u00a0Middle East Eye<\/em>\u2019s bureau chief for Turkey, Rag\u0131p Soylu, had this to say about the Republican nominee: \u201cBlond Erdogan\u201d.<\/p>\n<\/div>\nStrict walls separating monetary and fiscal policy<\/h2>\n
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