The US Federal Reserve maintains its position and opposes Trump



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The Fed left rates on Wednesday at 2.25-2.5% and continues to signal patience. Team Trump will not be satisfied with the decision.

Martin Lanz, Washington

President Donald Trump gave a speech on April 30. He has now discovered low inflation as a means of further pushing the US Federal Reserve (Image: Susan Walsh / AP Photo)

President Donald Trump gave a speech on April 30. He has now discovered low inflation as a means of further pushing the US Federal Reserve (Image: Susan Walsh / AP Photo)

As expected, the monetary policy committee of the US Federal Reserve System (Fed) left the target range for key interest rates at 2.25-2.5% on Wednesday. Fed Chairman Jerome Powell and his colleagues saw no reason to ease or tighten monetary conditions in the face of continued strong economic growth with cautious inflation.

In fact, the US is currently experiencing an economic climate that is comfortable from the point of view of economic policy: it is neither too hot nor too cold. Economic growth continues, wages rise and inflation remains moderate. You do not need to slow down or stimulate. The Fed also argues that interest rates are in neutral territory, that is, at a level that neither stimulates nor constrains the economy.

Phenomena of overheating, which would have made a renewed surge in the necessary interest, can not be identified. The latest inflation figures point in the opposite direction. Inflation was only 1.5% in March. Some members of the Monetary Policy Committee have explained for some time, due to moderate price developments, that a rate increase will only reappear once inflation is in fact serious and well above the Fed's 2% target.

The question of why inflation develops so cautiously, despite relatively strong economic growth, and whether anything needs to be done about it, has therefore been the main topic of Wednesday's session. This is because the restricted conditions of the labor market still do not seem to be reflected in the increase in prices, although nominal wages are 3% higher in the monthly comparison.

The common explanations for low inflation – such as poor economic growth abroad, technological advances or inaccuracies in the measurement of inflation – are no match for anyone. While the phenomenon is not well explained, central bankers fear a loss of credibility. If the inflation target is permanently lost and there are no plausible explanations, the concern is that consumers and business owners will continue to expect weaker inflation, which in turn may push prices down. On Wednesday, it was said that inflation will continue to be monitored closely.

White House Fire Drum

President Trump used low inflation as an opportunity to pressure the US Federal Reserve prior to the meeting. Via Twitter, he called again for an interest rate cut on Tuesday, by a full percentage point. He acknowledged that the US economy was doing well. But with this "wonderfully low inflation", the US could break records if the Fed cut interest rates a bit and do some quantitative easing.

Already last week, Trump's economic adviser, Larry Kudlow, demanded a cut in the rate because inflation is too low. These are not just attempts to influence US monetary policy by Trump and his unprecedented team. Their demands for interest rate cuts are also on the other side of the majority view, which supports the "patient" attitude and the at least temporary standoff of the central bank. And as for quantitative easing or tightening, the Fed has long announced a roadmap for the process of cutting the balance sheet and will not issue bonds in the fall.

Carousel of Trump Irritant Candidates

Following the ruling on Wednesday, criticism of the White House in the central bank should continue. After all, it seems unlikely at the moment that Trump will soon be able to raise personalities on the Board of Governors of the Fed, who can implement his monetary policy views. The US president has launched two such candidates with Stephen Moore and Herman Cain in recent weeks, but did not formally nominate them and submit them to the Senate's formal confirmation process.

Both are highly controversial, not only because of the lack of professional qualifications, but also because of allegations of sexual harassment (Cain) and misogynistic articles and statements (Moore). Cain, therefore, voluntarily resigned from an application. On Tuesday, several Republican senators predicted that even a formal nomination from Moore would not stand a chance. Trump can certainly benefit from this: as long as the two seats on the Fed's Board of Governors persist, it can continue to cause problems and pressure the central bank to re-launch "unconventional" candidates.

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