Will Trump take control of the Fed?

The US central bank (the Fed) will make an interest rate decision next week. However, this is not expected to lead to many surprises. Or will the bank succumb to pressure from the White House?

Actions speak louder than words. Yet next week will be all about the words of Fed chairman Jerome Powell. It is certain that the Fed will leave interest rates unchanged, because an unexpected interest rate move will cause a significant shock in financial markets. In addition, Powell will lose the confidence that he has cultivated since taking office (February 1) in one fell swoop. Even the weak growth figures of Friday, April 2018, may not tempt Powell to tinker with interest rates.

How Scary Is Growth Retardation?
There is a good chance that economic growth in the first quarter will turn out lower than the official forecast (1,8%). Investment bank JPMorgan Chase already revised its estimate to 1,5% in February. In the fourth quarter that growth still came to 2,2% and in the 2 quarters before that it was even 3,5% and 4,2%. However, the slowdown in growth is not as dramatic as it seems, as the US economy already received a strong boost in 2018 from President Donald Trump's tax cut. The trade war with China and the very cold winter weather also put a brake on growth.

The most likely scenario now is that economic growth in the United States will accelerate again in the coming months. US consumer confidence is high, the labor market is in good shape (unemployment is below 4%) and wage growth is above 3%. Inflation of 1,9% (over March) is also close to the official target of 2%. The economy therefore gives no reason to adjust interest rates.

Stock market cheers, currency world shudders
However, it is not a foregone conclusion that an interest rate move will not be forthcoming in 2019. This has everything to do with the increasing pressure from the White House. Low interest rates give the economy a boost, which bodes well for Trump as he heads into election year 2020. Previously, the inverted yield curve was a harbinger of a recession. Investors will therefore be welcomed by a rate cut, but the situation is different in the currency markets. Low interest rates make it less lucrative to hold assets in a particular currency.

Moreover, lower interest rates inspire little confidence; especially when the politicians try to get a foot in the door with the central bank. In futures markets, traders are already pricing in a 40% chance of an interest rate cut before the turn of the year. So it will be interesting to hear what Powell has to say. 

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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