Even as Donald Trump fired another broadside at the US Federal Reserve Board, the International Monetary Fund was endorsing the Fed's management of US monetary policy and implicitly urging it to hold its nerve, and its independence.
On Monday Trump tweeted that "despite a Federal Reserve that doesn’t know what it is doing" the US was on course for "one of the best Months of June in US history".
"Think of what it could have been if the Fed had gotten it right. Thousands of points higher on the Dow, and GDP in the 4’s or even 5’s [sic]. Now they stick, like a stubborn child, when we need rates cuts, & easing, to make up for what other countries are doing against us. Blew it!’’ he wrote.
The Trump tweets ignore the reality that, with unemployment below 4 per cent, any independent central bank implementing monetary policy in an economy operating near capacity and growing at four or five per cent would be raising rates aggressively, not sitting on their hands with a near-term bias towards easing as the Fed is at present.
Donald Trump: ”Now they stick, like a stubborn child, when we need rates cuts, & easing, to make up for what other countries are doing against us. Blew it!’’ Credit:AP
They also ignore the role that Trump’s trade policies – what the US is doing to other countries – are playing in depressing global growth rates, slowing the US economy and causing the Fed to pause, and consider reversing, what had been a cautious tightening of US monetary policy until late last year.
The IMF released an assessment of the US economy on Monday in which its executive board noted that the US was about to achieve its longest expansion in its history, although it also said US public debt was on an unsustainable path, trade tensions and uncertainties were continuing and medium-term risks to financial stability were rising.
It welcomed the Fed’s pause to US rate adjustments, saying it agreed any further increases should be deferred until there were clearer signs of wage or price inflation. The IMF directors said they appreciated the Fed’s continued adherence to a data-dependent approach and clear, forward-looking communication. (Unlike Trump's tweets).
The IMF said further increases in policy rates ran the risk of triggering an abrupt tightening of financial conditions through a stronger dollar, lower equity prices and a repricing of risk premia that would damage growth.
Those considerations, however, need to be balanced against the risk that wage or price inflation could accelerate as capacity constraints became more binding, forcing rates to rise faster than anticipated and potentially creating further market volatility and downward pressure on activity and employment.
On balance, therefore, further rate increases should be deferred, the IMF said, saying falling inflation, firmly anchored expectations, "strong Fed credibility," evidence of a flat trade-off between inflation and slack, and continued uncertainties about the global outlook all argue in favour of a pause to further changes in monetary policy.
Fed chairman Jerome Powell is defying Donald Trump and said he plans to see out his four-year term.Credit:AP
The Fed has maintained its credibility because it has resisted the regular and aggressive exhortations from Trump to cut rates and halt the shrinking of its balance sheet, with the accompanying regular attacks on its chairman, Jerome Powell.
While Trump denied at the weekend that he had canvassed sacking or demoting Powell recently (after widespread reports that he had), he said it had been proven that Powell made a mistake when the Fed raised US rates last year.
"I’m not happy with his actions. I don’t think he’s done a good job," Trump said of Powell, who has said Trump doesn’t have the legal authority to sack or demote him and that he fully intends to serve out his four-year term. Trump claims otherwise, saying that he’d be able to demote Powell if he wanted to.
The Fed is trying to manage US monetary policy against a difficult and volatile background, partly attributable to the Trump administration’s tax, spending and trade policies. Trump is probably going to get the rate cut he wants, for the wrong reasons, as the Fed tries to counter the effects of his policies.
I’m not happy with his actions. I don’t think he’s done a good job.
As the IMF assessment says, the US fiscal position – US government debt of $US22 trillion, trillion-dollar deficits and a federal government debt-to-GDP ratio of 78 per cent and rising – may have supported US growth but it is unsustainable.
The US financial system appeared healthy but medium-term risks to financial stability were rising, with corporate leverage historically high, the share of non-performing commercial loans creeping up and underwriting standards weakening.
Asset valuations were rich but risk and term premia and the market pricing of volatility were at low levels and, as a result, financial conditions were "extremely loose".
The IMF said it was concerned there had been little institutional response to counter the growing risks to medium-term financial stability and instead there had been a steady easing of regulatory constraints (another Trump administration policy initiative) at a late stage in the cycle.
The Fed, with its limited policy instruments, can only respond to the out-workings of policies that may have provided a sugar hit to the US economy but threaten to destabilise its foundations. Pro-cyclical and pro-Trump monetary policies would only add to the levels of uncertainty in an economy already laden with risk.
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