Trump and the Fed: Do the President’s Comments Matter?


In recent weeks, Trump has criticized the US Federal Reserve’s hawkish stance, and their guidance which indicates that further rate hikes are in the pipeline.  Past presidents have avoided commenting on the Fed publicly, as it might be seen as interfering.  Trump however, cares little about appearances. 

 

“I think the Fed is making a mistake. They are so tight. I think the Fed has gone crazy” – Donald Trump October 10th, 2018

 

Meddling Presidents of the Past

 

There is a widely held view that the Federal Reserve is a body independent of the sitting government.  After the Fed increased interest rates in 1965, President Lyndon Johnson called the then-Fed Chairman William McChesney Martin to Johnson’s Texas ranch, and purportedly shoved him against a wall to show his displeasure with the rate hike.  Presidents have been pressuring the Fed virtually since its creation:

 

 

So What Makes This Time Different? 

 

There is a common perception, even among Fed experts, that presidents can’t fire their the Chair and Board of Governors once they take office.  This however, is a misconception1.  The Federal Reserve Act doesn’t explicitly give the President the power to fire Fed board members, but Section 10 of the Act indicates that it is possible;

 

 

“…thereafter each member shall hold office for a term of fourteen years from the expiration of the term of his predecessor, unless sooner removed for cause by the President

 

This last line is the key.  Clearly when this Act was written, Congress thought that the President should have the power to remove a board member before the end of their term.  And we now have a President who seems to relish exercising unilateral power in ways no other president has done;

 

 

So it would not be surprising should he decide to fire Fed Chairman Jerome Powell ‘for cause’. We think this is a low probability event, but it is worthy of consideration.

 

What Would Happen to Currencies If Powell is Fired?

 

As we have stated many times in our Big Picture pieces, the market hates uncertainty.  Currently we have a US central bank who has been quite clear in their plans to continue raising rates, citing concerns over the extremely low unemployment rate, and escalating inflation as reasons to tap the brakes on growth.  Whether or not you agree with their plans, there is a great deal of transparency and certainty at present.  Should Trump replace Powell with someone who will be more dovish, while this may be seen in a positive light by the equity market, at least in the short term, the currency market will likely revise lower their forecasts for the USD, as forward-looking interest rate differentials will narrow.  More importantly though will be an assumption by the market that the Fed is no longer independent, and is in fact under the control of the President.  Faith in the Fed will be significantly eroded, and without a strong central bank, the market will begin to move investment to countries with a more stable and independent central bank.

 

1 – Forbes: “How Trump Could Fire Powell and Rebuild The Fed” – September 6th, 2018

 

 

 

Author: John Glover

 



 

White Papers

 

 

FX Hedging:

10 Common Pitfalls

Download> 

Commodity & FX Risk:

An Integrated Approach

Download> 

The Corporate Use of Credit Derivatives:

Where Next?

Download> 

Corporate Hedger’s Guide to Basel III

Download>

Currency Volatility – Are markets nearing an inflection point?

Download>

Testimonial

FX Risk

 

“Validus designed an innovative and practical hedging strategy to address our underlying FX risk in the context of very distinct and diverse sources of competition. We are delighted with the outcome and impressed with their on-going response to the changing business and market dynamics”.

 

Paul Stobbs, Managing Director, Attraction World

Testimonial

Private Equity

 

 “The Validus team understand how private equity thinks about financial risk management issues and they are rigorous in the way they help our portfolio companies to understand and mitigate their risks.”

 

James Markham, Partner – Portfolio Management, Graphite Capital LLP

Testimonial

FX and Commodity Risk

 

“Validus provides us with independent strategic advice relating to our long-term currency and commodity risk management program.  The people are extremely capable and collaborate very well with our finance and operations teams here at JD Irving.”

 

Mark Bettle, Director, J.D. Irving Ltd.

Testimonial

FX  Risk

 

 “Validus developed a tailored hedging solution to mitigate the risks from our unique combination of existing supplier agreements. The implementation and management of this rolling hedging programme with our FX service providers has been expertly and efficiently handled”.  

 

Mark Goldby, Finance Director, SMS Electronics Ltd.

Testimonial

Commodity Risk

 

“Validus worked with us to develop a comprehensive commodity risk management programme – their analysis was both insightful and actionable.   We particularly value their independence, and they continue to work alongside our internal team to ensure our commodity price risks are managed effectively”


Gerry Gray, Finance Director, Strix Ltd.


Testimonial

FX, Commodity & Interest Rate Risk

 

“Validus comes up with risk management solutions that are innovative and comprehensive but practical to implement, that is their strength compared to other consulting companies we have worked with in the past.  Validus provided valuable insights into how FX, interest rate and commodity risks impact our organisation, and provide actionable recommendations and solutions.”

 

Andrew Ayres, Finance Director, U-POL Ltd.

Recent Comments