What are you doing at 7 a.m. on a Sunday morning? A morning jog? Preparing breakfast? Sleeping in? President Trump isn't. This Sunday morning at 7 a.m., Trump blasted the Federal Reserve (Fed) for its monetary policy. Obviously, Trump knows the Sunday morning political talk shows would air live in a few hours and in this way he'd be able to deflect from whatever they had planned on discussing. "If the Fed had done its job properly, which it has not..." the president begins in his tweet as he criticizes the Federal Reserve led by his very own appointee. Is central bank independence a myth? Did it ever exist? Where does the Fed go from here and what does it mean for broader financial markets?
I've addressed the issue of central bank independence many times in my column and in order not to bore dedicated readers, I'll cut to the chase. The central bank, any central bank, has never been "independent." The Supreme Court of the United States is a great way to interpret "independence" as the justices have lifetime appointments and thus are the ultimate in not being affected by politicians, right? The prestige of the office makes it attractive to stay in and thus many justices either pass away as justices or retire well into old age, however, even retirement isn't done "independently." Researchers have shown that justices generally retire when the current president shares party affiliation of the president that appointed them. In other words, Republican-appointed justices wait to retire and allow Republican presidents to choose their successor and the same is true for Democrats. Justices also share the ideologies of the presidents that appointed them for the most part and vote along these ideological lines during their tenure.
Now that we've established that the most independent of independent institutions, the Supreme Court, is anything but, we can safely observe that central bank appointees often mirror the ideologies of the governments that appointed them. What makes President Trump's criticism noteworthy is that he has consistently attacked the Fed even when it was chaired by an Obama appointee and continues to do so while being chaired by his appointee.
Trump continues in his tweet, saying: "the Stock Market would have been up 5000 to 10,000 additional points and GDP would have been well over 4% instead of 3%...with almost no inflation. Quantitative tightening was a killer, should have done the exact opposite!" Trump ironically called for higher rates when he was candidate Trump and has switched back to calling for lower rates now. Going into the 2020 presidential election, Trump needs a strong economy. Lower interest rates will allow for increased ease of business and will please his base. Commenting on the future of the Federal Funds Rate the day after President Trump's tweet, Chicago Fed President Charles Evans said that he sees rates flat until at least after the election and perhaps even lower. If Evans, hardly a rate dove, thinks rates will be flat or lower, they will be flat or lower.
With Fed rate hikes off the table for the next 18 months, markets will eye the first rate cut and the first signs of the impending recession many economists have been warning of for months now. I predict a rate hike before the end of the year as Trump's criticism will move into high gear during the campaign and the Fed, independent as it may seem, will be staffed by at least two new Trump appointees almost certain to deliver the cuts Trump has called for.
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