Why Trump has little power over the Fed

U.S. President Donald Trump has become increasingly critical of the U.S. Federal Reserve. But there is only “mild cause for concern.”

So said Derek Holt, vice-president and head of Capital Markets Economics at Scotiabank in a Thursday report, which outlines several reasons why the U.S. leader currently has little power over the central bank.

Those reasons include the fact that Fed Chair Jerome Powell will have his seat until at least 2022, after the next presidential election. As well, “Trump has no direct influence over regional Fed vacancies” and Fed Board of Governors (BoG) hiring processes.

For those, “[…] there is no need for Presidential or Congressional approval,” Holt wrote.

Still, the Trump administration has fulfilled expectations that it would “come to be increasingly concerned about the sterilization of its stimulus efforts by the markets, including through the USD and the Fed,” and that will likely continue, Holt said.

His report followed comments made by Trump on Thursday, in which he cast aside concerns about the Federal Reserve’s independence, saying he was “not happy” with the Fed’s recent interest rate increases.

Trump told CNBC in an interview: “I don’t like all of this work that we’re putting into the economy and then I see rates going up.”

Last month, the Fed raised its benchmark rate for a second time this year and projected two more increases in 2018.

Read: Fed chair signals gradual rate hikes in tame inflation era

The central bank’s rate hikes are meant to prevent the economy from overheating and igniting high inflation. But rate increases also make borrowing costlier for households and companies and can weaken the pace of growth. In particular, the Fed’s most recent rate hikes could dilute some of the benefit of the tax cuts Trump signed into law last year.

The president acknowledged that his comments about the Fed would likely raise concerns. The central bank has long been seen as needing to operate free of political pressure from the White House or elsewhere to properly manage interest rate policy.

Trump’s comments did have an impact, Holt said, noting that both the greenback and U.S. Dollar Index (DXY) were affected.

However, “The DXY has since recovered a part of this and, in my view, there should be little follow through,” he wrote. (That index is still trading about US$0.50 lower than July 19, as of 10 a.m. on July 20, but it remains around three-month, six-month and one-year highs.)

Overall, Holt said in his commentary, “the issue is less about what Trump can ‘let’ the Fed Chair do and more about how little he can do about it in any practical direct sense, especially within near- to medium-term horizons.”

He adds: “On top of volatility that was induced earlier in the year in remarks by the President and his Treasury Secretary Steve Mnuchin, it appears that the administration is still feeling its way on the matter,” which could cause “apprehension toward USD-denominated assets […].”

Also read: What to expect from the Fed in 2019

Trump continued to call out the Fed on Friday. He tweeted: “The United States should not be penalized because we are doing so well. Tightening now hurts all that we have done. The U.S. should be allowed to recapture what was lost due to illegal currency manipulation and BAD Trade Deals. Debt coming due & we are raising rates – Really?”

The president’s criticism is ironic, Holt noted in his report, given Trump’s “pointed criticisms of Yellen in September 2016″ were based on his disapproval of low interest rates and on how, if rates were raised, he thought that would help the stock market.

On a positive note, “Investors can cheerily note that since the Fed first began raising borrowing costs in December 2015, the S&P500 has rallied by about 35%,” Holt said.

No rules broken

U.S. administrations don’t often comment on Fed actions, but Trump isn’t the first president to voice displeasure, says Avery Shenfeld, managing director and chief economist for CIBC, in a Friday report.

“While his recent predecessors maintained their silence on monetary policy matters, both Nixon and Reagan leaned on the Fed during their time in office, while George H.W. Bush griped after his term,” he writes.

However, Trump’s views likely won’t affect the Fed at its next meeting, set for July 31-Aug. 1. “The last time a central bank seemed to have succumbed to pressure for easier monetary policy, we were left with the sharp inflation climb of the Nixon era, hardly a comforting precedent,” Shenfeld warns.

Further, he says, “if [Trump’s] looking for reasons for a U.S. dollar rally, he should also be looking in the mirror. Markets that worry about trade war damage to Europe, Canada, or Mexico will be tempted to sell those currencies, expecting their trade balances to deteriorate, or their central banks to take a softer line on monetary policy.”

Read the CIBC report.

Read the Scotiabank report.