President Trump will continue to target the Fed in the coming months if the US economy continues to slow. However, this will have the opposite effect, expects Mark Dowding, Chief Investment Officer at RBC BlueBay Asset Management.
Financial markets rebounded last week after it became clear that Trump does not want to fire Fed Chairman Jerome Powell, despite earlier speculation to that effect. “Trump has made no secret of his desire to see lower interest rates,” Dowding said. “But given that his own policies are fueling inflation, it makes sense for the central bank to remain cautious with its interest rate policy, even as the outlook for growth deteriorates.”
According to Dowding, Trump’s continued pressure on the Fed makes a rate cut even more unlikely. “The central bank wants to avoid appearing to be giving in to political influence at all costs. Trump’s interference is actually closing the door to lower interest rates even further.” According to Dowding, it is ‘inevitable’ that Trump will continue to take out his frustration on the Fed, especially if the economy falters. However, the financial markets will not accept it if the president undermines the independence of the central bank. Trump will therefore have to content himself with a role from the sidelines.
Instead of a so-called ‘Fed put’, where the central bank eases policy when markets are disappointing, there is more of a ‘Trump put’. Dowding: “Disruptive policy is toned down or postponed when confidence in America is under pressure on the markets.”
In addition, there is a growing awareness that the trade war between the US and China has gone too far. “Since the last announcements, the volume of trade between the two countries has fallen sharply. The consequences for supply chains will become visible in early May and could significantly disrupt economic activity in the short term,” Dowding warns.
