US President's criticism of the Federal Reserve's interest rate policy
Comment of the Day

July 20 2018

Commentary by Eoin Treacy

US President's criticism of the Federal Reserve's interest rate policy

Thanks to Niru Devani for this timely article.

US President Donald Trump broke with tradition and levelled criticism at the Federal Reserve about their interest rate policy and its impact on the US dollar as well as economic growth. In an interview on CNBC, he said “I’m not thrilled,” “Because we go up and every time you go up they want to raise rates again . . .  I am not happy about it. But at the same time I’m letting them do what they feel is best.” While presidents appoint the chairman of the Federal Reserve and other committee members, they do not interfere with their management of monetary policy. The last time a president commented on Fed decisions was in the in the 1990s when George W Bush expressed his displeasure with the Fed’s policy after losing the election.  

With the Fed’s target rate at 1.75 per cent to 2 per cent, the central bank is expected to raise rates twice more this year. Trump’s intervention should not stop them from continuing to raise rates as long as economic growth and inflation justify it. The Fed has faced criticism from both the left and the right in the years following the financial crisis. Mr Trump also expressed unhappiness with the strength of the dollar against the euro and the renminbi. He criticised the Europeans and the Chinese for being passive at best and currency manipulation at worst. The latter point was targeted at the Chinese.

Mr Trump’s comments triggered a fall in the U.S. dollar which was approaching some resistance against the euro which comprises over 50% of the dollar index. The euro has so far managed to find support around the 1.15 level versus the dollar and it did so again yesterday afternoon following these comments. The dollar has continued to pull-back today.  The index hit its high for the year earlier yesterday at 95.652 and was trading around 94 at its low point today. The president’s unorthodox verbal intervention in the currency markets has so far had the desired impact but it will not change the trend of a higher dollar over the coming months given that the U.S. is the only major developed economy apart from Canada raising rates.

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