Published: Sun, August 11, 2019
Markets | By Erika Turner

President Trump Not "Thrilled" with the Strength of the US Dollar

President Trump Not

In a strong rebuke to President Donald Trump, the four living former leaders of the Federal Reserve say that the head of the nation's central bank should be able to make interest-rate decisions free of political pressure and the threat of being removed or demoted. The Fed did slash its key policy rate by a quarter-point last week and economists believe that more rate cuts are coming to cushion the USA economy from the turbulence stirred up by Trump's trade battle with China.

In a series of tweets, he noted that overnight three central banks - those in India, Thailand and New Zealand - had cut rates. "Our problem is a Federal Reserve that is too proud to admit their mistake of acting too fast and tightening too much", Trump tweeted on Wednesday.

Last week, Fed policymakers cut interest rates for the first time since 2008.

Delivered all at once, a full percentage point would be dramatic - the sort of step associated with a severe economic shock, as opposed to the quarter-point increments that the Fed tends to rely on to fine-tune its target interest rate. Earlier this week, he called China a "currency manipulator".

Most economic commentators believe that the protectionist trade wars that Donald Trump has sparked around the world (most notably with China) have been a contributory factor in the slowing of the global economy.

All living former Fed chiefs have issued a call for the independence of the institution, in a letter seen as critical of Trump.

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Beijing warned that move would "severely damage worldwide financial order and cause chaos in financial markets", while preventing a global economic recovery.

Maurice Obstfeld, an economics professor at the University of California, Berkeley, and a senior fellow at the nonpartisan Peterson Institute, said the President has realized that "if there's weakening in the economy, if there's weakening in the stock market, the prospect of another Fed interest rate cut rises, and so he might view the Fed as providing some insurance for him on that front".

In terms of the Fed's leadership, they said Trump has the opportunity to reappoint Powell when the latter's four-year term ends or choose a new chairman. Investors are now assuming another rate cut next month, followed by two more in the coming months.

It's part of a strategy where China is willing to accept the attrition of hurting domestic businesses to hold out for a more favorable trade deal.

"This then feeds through into consumer sentiment and spending more broadly in the economy with recession risks mounting".

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