Richard Koo, Chief Economist at Nomura, points out that in his testimony before Congress, Chairman Powell emphasized the strength of the US economy and argued that interest rates should be normalized if this favorable economic environment is to last.
Key Quotes
“His remarks, coupled with the fact that US inflation is currently running around 2%, has deepened the market’s conviction that the Fed will carry out another two rate hikes by the end of 2018.”
“In response, Mr. Trump caused a stir by voicing his opposition to the Fed’s rate increases, thereby breaking a taboo that had been in place since Lyndon Johnson was president.”
“I think President Trump’s comments stem from the fact that the only two achievements he can boast of are the strong economy and high stock prices (the tax cuts enacted late last year were well received by the wealthy but were not nearly as popular among the general public), and he wanted to prevent further monetary tightening from undermining them.”
“He may also have been preparing for a future fall in share prices, since this will allow him to claim that the market decline was the Fed’s fault and not his own.”
“In reality, the US president’s trade war with China and hardline stance vis-à-vis Turkey are both premised on a strong US economy and stock market, and I suspect he would quickly tone down his statements if share prices were to fall sharply.”
“I believe the president’s comments will actually force the Fed to raise rates as scheduled in order to demonstrate its independence.”
“If the US central bank were to slow the pace of tightening when the economy is this strong, it could be seen as having caved in to pressure from the president, and that could spark inflationary concerns similar to those recently observed in Turkey.”
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