One of the most controversial characteristics of President Donald Trump’s second mandate is his incessant criticism of the Federal Reserve. (Fed) President Jerome Powell to keep high interest rates: a position that Trump argues is unnecessarily expensive for the US economy.
But this is more than a rhetoric. Trump attacks the Fed Board, threatening an institution known for its political independence. Ironically, this same assault runs the risk of failing, deepening what Trump and others describe as a Fed that is “behind the curve”, which could lead to a deeper sale in the US dollar.
“Political pressures make it difficult to change belief to an openly misleading base. That leaves policy data promoted by (Like this) instead of preventive. That is bad for the USD, “Market Insights team said in Lloyds Bank directed by Nicholas Kennedy, in a client note on September 18.
Trump’s attack on Fed
Last Thursday he marked a new chapter in the Trump campaign against the Central Bank, since his administration took the unprecedented step to request the United States Supreme Court to allow the dismissal of the governor of the Lisa Cook Federal Reserve. This would be the first forced elimination of a governor fed in the Fed from the foundation of the institution in 1913.
The measure followed a temporary judicial block issued by the United States District Judge, Jia Cobb, who prevented the expulsion of Cook, a designated Biden, waiting for other legal procedures.
According to the Insights Bank Market team from Lloyds, such attacks are likely to increase as Powell enters the last months of his mandate as president. The recent Trump designated in the Fed, Stephen Look, is already asking for fast fire tariffs and wants the bank to reduce the cost of reference loans at 50 basic points at the recently completed meeting.
Behind the curve
In essence, the Trump campaign reflects a desire for a more receptive Fed to its economic worldview, which requires ultra -low rates around 1%, at least significantly of the current 4%.
Trump has argued that current rates maintain the prohibitively high mortgage costs for many Americans, hindering housing ownership and imposing billions in unnecessary expenses for debt refinancing. He frames this as a lost opportunity in a “phenomenal” economy in another way. Meanwhile, many economists agree that rates are still too high given the signs of weakening labor markets and consumer health.
Therefore, the Federal Reserve is widely perceived as “behind the curve”, a technical term that means that it is too slow to reduce rates in response to evolving economic conditions.
However, Trump’s insistence on forcing the fastest risk cuts to push the Fed behind this curve.
Damn if they do, damn but
Imagine to sustain the reins of the most powerful central bank in the world, responsible not only for the largest economy in the world, but also for the destination of the global reserve currency, the USD. Now imagine the political pressure to reduce rates quickly, against fear to seem politically committed. This leaves the policy formulators convicted if they act and cursed if they do not.
Then, unlike the typical policy formulators that are adjusted with the calm measure in response to the data, Powell and his colleagues now operate under intense political pressure and public scrutiny of the White House. They face a classic CATCH-22: accusations of succumbing to political pressure in case of rapid rates cuts (even if they do it independently); Wait too much and risk the possible deepening of an economic deceleration.
This dynamic could generate reflexive stubbornness. To avoid accusations of capitulating at the political pressure, the Fed can be inclined instinctively towards caution, waiting for more time and maintaining high rates. However, this posture can exacerbate the problem: delayed tariff cuts maintain monetary policy out of synchronization with economic conditions, just like a patient who resists mild medication just to require drastic doses once a fever increases.
The high doses of rates cuts could be interpreted in the markets as a sign of panic, which leads to greater volatility in financial markets, including cryptocurrencies.
Dollar at risk
The CATCH-22 situation could also weigh on the US dollar, an upward development for assets called dollars such as Gold and Bitcoin.
The dollar index, which measures the value of Greenback against the main currencies, has fallen almost 10% this year to 97.64. Meanwhile, the price of Bitcoin has recovered in 24% to $ 115,600.
