Did the Federal Reserve leave the president of the US in offside?

Călin Rechea (translated by Cosmin Ghidoveanu)
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Did the Federal Reserve leave the president of the US in offside?

An unexpected change in the opinion of Jerome Powell, the president of the Federal Reserve, would show that, ar first glance, the president of the United States has imposed his will.

Donald Trump has attacked the position of the Fed several times over the last months, including in a statement that "the Fed has gone crazy", as he was deeply unhappy with the continued rate hikes.

In his opinion, the Federal Reserve has done nothing but undermine the economic growth stimulated by the fiscal measures introduced by the White House.

Up until the end of last week Powell did not respond to the attacks. The only substantial "reply" came in the beginning of October 2018, when the chairman of the Fed said that the policy rate is still far from its neutral level, namely the interest rate that doesn't either stimulate the economy, nor does it cause it to slow down or severely contract.

Powell's statement came just a few days after a new rate hike of 0.25 percentage points, to the target interval of 2% - 2.25%. During this period, the effective policy rate has remained steady around the 2.2% value.

A radically different opinion was provided by the same Jerome Powell mid last week, when he has presented the first report on financial stability before the Economic Club of New York.

"The interest rates are still low according to historic standards and remain slightly below the estimates for their neutral level for the economy", the president of the Federal Reserve said, as the report on financial stability shows that "the escalation of commercial tensions, the geopolitical uncertainty and other adverse shocks can lead to the decrease of the risk appetite among investors", and "the drop in the price of financial assets can be significantly high, amid higher values than those that were the historic norm".

This part of the report was ignored by investors, who have preferred to focus only on the implicit "promise" that the Fed would raise interest rates less frequently next year or will even halt the process and have massively bought the shares listed in New York.

Nicholas Colas, the founder of analysis and financial consulting firm DataTrek Research, thinks that Jerome Powell's statement has been "a genius move", according to an article reproduced by Zerohedge.

"By relaxing the stance of the Fed on the interest rates, Powell has placed the entire responsibility for the direction of the markets on the shoulders of president Trump", Colas writes. Furthermore, "Powell's new attitude seems like a calculated move to increase the pressure on president Trump to force the progress at the G20 meeting". In other words the president of the Federal Reserve succeeded in leaving the president of the Federal Reserve in offside?

But a Societe Generale analyst thinks that there is no Machiavellian plot involved, just "the correction of the beginner mistake made in the beginning of October". Moreover, Powell's latest statement does not indicate a major change for the Federal Reserve, and the likelihood of the policy rate being raised to 3% has remained unchanged and only the reaching of this level could cause the Fed to take a break, especially given the optimistic forecasts of the Fed concerning the evolution of the economy.

Nevertheless, Bloomberg writes that the majority opinion among investors is that the interest rate will be raised only once in 2019, down from three times, after one last hike in 2018, in this month's monetary policy session.

Prior to what looks like a shift of opinion from the US central bank, Steven Mnuchin, the Secretary of Treasury, has asked the dealers of government bonds to express their preferences on the ways of tightening the monetary policy, according to an article by Bloomberg. The options have been the continuation of the rate hikes or the more accelerated reduction of the balance sheet of the Federal Reserve.

Mnuchin's "poll" was made at the quarterly meeting of the TBAC, Treasury Borrowing Advisory Committee, which includes representatives of investment funds and banks, such as Citadel, Goldman Sachs or JP Morgan.

Beyon the tragic irony of the representatives of the government meeting quarterly with those of the banks to "consult" on the need for financing and the fact that the representative of the government, the Secretary of Treasury, was an executive at Goldman Sachs, the meeting has not led to the clarification of the preferences.

Mnuchin's initiative also came among an increase in the tension between him and president Trump, who may have accused the former behind closed doors, of having misled him by backing Jerome Powell for the position of chairman of the Federal Reserve.

As far as the tightening of the monetary policy by shrinking the balance sheet of the Fed, the latest data of the Federal Reserve Bank of New York shows that the total value of the balance sheet of the Federal Reserve has decreased 33 billion dollars in November 2018, to 3.886 trillion dollars, as the size of its portfolio of American government bonds has decreased by 17 billiont, to 2.253 trillion dollars.

The editorial management of the Financial Times recently wrote that "Donald Trump's battle with the Fed is far from over" and warned that "investors should not misconstrue Powell's statements" nor should they believe that "Powell has bowed to the president".

On the contrary, pressures from the White House could push the chairman of the Federal Reserve to "stress his independence" and to adopt a harsher attitude when it comes to the normalization of the monetary policy.

"The battle between the president and the Fed may have only begun", FT concludes.

But what if president Trump has avoided between caught in offside on time? His meeting with China's president, during the annual reunion of the g20 member countries, resulted in the announcement of a 90 day "truce", whose goal is, of course, to prevent the trade war between the two global powers.

But will this agreement be enough to stop the downward trend of the global markets?

"The interest rates are still low according to historic standards and remain slightly below the estimates for their neutral level for the economy".

Jerome Powell, preşedintele Federal Reserve

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