LONDON: President Donald Trump’s criticism of the Federal Reserve is eroding the political independence of the US central bank and leaves it in a “no win” quandary as it debates loosening monetary policy, a top economist at Pacific Investment Management Co warned.
After Trump returned to attacking the Fed via Twitter on Friday and Turkish President Recep Tayyip Erdogan fired his top monetary policymaker on Saturday, Pimco’s global economic adviser Joachim Fels used a report to clients to declare the “heyday of central bank independence now lies behind us.”
The risk for Fed Chairman Jerome Powell and his colleagues is that they are in a lose-lose situation as they consider whether to cut interest rates this month and by how much, said Fels.
One potential downside is if the Fed seeks to prove its independence by not loosening policy as it might otherwise, and the second is that any easing will be regarded as bowing to political pressure.
“The constant frontal-attack on Chair Powell and his colleagues and the repeated calls for rate cuts and QE by the president and other members of the administration put the Fed in a no-win situation,” Fels said.
Trump on Friday said the central bank “doesn’t have a clue,” the latest in a string of barbs against Powell and the Fed, who he contends have imposed overly-tight monetary policy on the economy.
Trump last week nominated economists Judy Shelton and Christopher Waller to seats on the Fed’s board of governors. Both are thought likely to enthusiastically support the president’s call for lower rates.
While Fels said financial markets would typically respond to such a climate by selling the dollar and longer-term bonds amid inflation concerns, that playbook may no longer apply.
Instead, he argued government pressure to buy bonds may keep the yield curve flat and politicians may pursue less fiscal stimulus if they felt central banks would do the work for them.
And as other central banks are easing monetary policy, the dollar is unlikely to materially weaken, he said.
“Like it or not, get used to the new normal of dependent central banks, perpetually low interest rates and quantitative easing,” said Fels.