Trump’s Fed Attacks Are Helping to Drive Rate Cuts, Paper Says

par Featured articles licensed from The Wall Street Journal | le 27 September 2019

By Michael S. Derby – The Wall Street Journal

The Federal Reserve may be under President Trump’s thumb more than central bank officials are willing to let on.

New research says the president’s attacks on the Fed and its interest-rate policy are influencing market expectations and, in turn, the choices central bankers make. Put another way, when Mr. Trump calls on the Fed to lower rates, markets move to reflect that could happen. And that helps push the Fed, mindful of market expectations, to implement the rate cut the president had been agitating for.

“We find strong evidence that the consistent pressure applied by President Trump to pursue more expansionary monetary policy is manifested in the market expectations of a lower target rate,” the paper said. Evidence that Fed officials are influenced by market expectations when setting policy “implies that even if President Trump does not directly influence Fed decisions, his political pressure can still affect policy indirectly by changing market expectations regarding the Fed.”

And the paper’s authors see a tangible market impact from Mr. Trump’s Twitter storms. “The tweets do not simply affect expectations about the timing of changes that markets were already anticipating, but instead move market expectations about the stance of monetary policy,” the paper said, adding the market impact has grown greater since the Fed started lowering its short-term rate target in July.

The paper was written by Francesco Bianchi of Duke University, and Thilo Kind and Howard Kung, both of the London Business School. The paper was published by the National Bureau of Economic Research.

Their research tracks the president’s long-running Twitter attacks on the Fed, in which he has called for aggressive rate cuts. The president has called for the Fed to slash rates in a manner not seen since the financial crisis, into even negative territory, in an economy that is growing steadily with low unemployment.

Fed officials have shrugged off the president’s criticism—he recently called them “boneheads”—and have stressed that the institution is independent by law.

“I assure you that my colleagues and I will continue to conduct monetary policy without regard to political considerations,” Fed Chairman Jerome Powell said at a press conference after last week’s Federal Open Market Committee meeting. “We’re going to use our best judgment based on facts, evidence, and objective analysis in pursuing our goals, and that’s what I have to say on it.”

While the U.S. economy is doing generally well, the Fed lowered rates in July and September to reduce the risks to the country posed by trade uncertainty and slowing global growth. Markets believe there is a good chance of more rate cuts.

“We cannot establish the exact motives for the rate cut, but only that markets might doubt that the Federal Reserve acted purely in response to changes in the economic outlook,” given that the economy appears healthy, the paper said.