change of federal reserve chairman, vs proposed interest rate cut

Federal Reserve signals readiness for interest rate cut
Nick Beams, WSWS, Jun 20 2019

The Pindo Federal Reserve made no change to its base interest rate at the conclusion of its two-day policy meeting yesterday, but indicated it is prepared to make cuts later this year, citing increased “uncertainties” in the economic outlook in Pindostan and globally. The outcome was in line with financial market expectations. The major Wall Street indexes showed small rises for the day on the back of the decision and the language used in the statement of the policy-making Federal Open Market Committee that accompanied it. In his press conference, Fed chairman Jerome Powell gave a clear indication that rate cuts were on the table later this year, pointing to what he called “significant changes” in the FOMC statement from previous months. he said:

From the beginning of the year, we have used the word “patient” in assessing the need for any policy changes. That word has been removed from the latest statement. In light of increased uncertainties and muted inflation pressures, we now emphasize that the Committee will closely monitor the implications of incoming information for the economic outlook, and will act as appropriate to sustain the expansion.

The Fed revised down its assessment of the state of the economy, saying activity was rising at a “moderate rate” rather than the “solid rate” of expansion it noted in May. The FOMC statement said that while household spending appeared to have picked up from earlier in the year, “indicators of business fixed investment have been soft.” Powell said at the Fed meeting on May 1 the continued “patient stance seemed appropriate” and there was no strong case for adjusting the rate, but since then cross-currents had re-emerged. The major development was the Trump administration’s escalation of the trade war against China. At the previous Fed meeting the general expectation was that China and Pindostan were on course to sign a trade deal. But within five days, that scenario was overturned when Trump claimed China was backtracking on previous commitments and threatened to impose a 25% tariff on an additional $300b worth of Chinese goods. Since then negotiations have come to a virtual standstill. The new tariff hikes are expected to come into effect in July unless a last-minute change occurs as a result of the meeting between Trump and Xi at the G20 summit meeting in Japan at the end of this month.

Among the other cross-currents, Powell cited concerns about the strength of global growth, a fall in business confidence and the deterioration of risk sentiment in financial markets, a reference to the fall in yields on long-term bonds in Pindostan and globally. The decision to hold the rate steady was not unanimous. One member of the 10 who have votes on the 17-member FOMC, James Bullard, president of the St Louis Fed, indicated he wanted an immediate rate cut of 0.25%. It was the first time since Powell’s appointment as Fed chair in Feb 2018 that the FOMC decision has not been unanimous. While the nine other voting members decided to hold rates, they are moving in the same direction as Bullard. Powell said though the baseline remained favourable, the question was whether the uncertainties would continue to weigh on the outlook. He said:

Many FOMC participants now see that the case for a somewhat more accommodative policy has strengthened.

The Fed decision has broadly met market expectations, at least for now, but whether it satisfies Trump remains to be seen. He has called for a rate cut of at least 1%, claiming that the Dow Jones index would be up 10,000 points from its present level were it not for the Fed’s “disruptive” actions. On Tuesday, Trump again raised the possibility of removing Powell from his position. Asked about this threat at his press conference, Powell said the law was clear that he had a four-year term and “I fully expect to serve it.” The boosting of the stock market is going to be a central theme of Trump’s re-election campaign. In a Twitter post at the weekend, he predicted “market crash the likes of which has not been seen before” if he were not returned in 2020.

The issue of interest rates and monetary policy could also become a feature of the economic warfare being waged by the Trump administration against Pindo economic rivals. Earlier this week, ECB president Mario Draghi indicated that the bank could provide a new stimulus to European financial markets in light of “lingering softness” in the European economy and persistently low inflation. Speaking at the ECB’s annual conference in Portugal, Draghi repeated earlier remarks that the central bank had “considerable headroom” to launch an expansion of its €2.6t QE program. His remarks sent the value of the euro down against the dollar. Trump tweeted:

Mario Draghi just announced more stimulus to come, which immediately dropped the euro against the dollar, making it unfairly easier for them to compete against Pindostan. They have been getting away with this for years, along with China and others. … German DAX way up due to stimulus remarks from Mario Draghi. Very unfair to Pindostan.

Draghi hit back by saying:

The ECB’s mandate is defined as lifting inflation close to but below 2%. We are ready to use all the instruments that are necessary to fulfil this mandate, and we can’t target the exchange rate.

Trump’s remarks indicate that Pindostan is set to harden its attitude to Eurostan in ongoing trade negotiations. Pindostan is threatening that auto tariffs of 25%, which would heavily impact on Germany, will be imposed if Brussels does not meet its demands, particularly on the opening of Euro markets for Pindo agri exports. Key members of the Trump admin including White House trade adviser Peter Navarro have expressed the view that Euro exporters, most notably Germany, have benefited to the detriment of Pindostan from a low value of the euro. The increase in economic conflicts between the major powers has raised concerns about whether there would be the same level of cooperation that existed in response to the global financial crisis of 2008, in the event of another crisis. In an interview with the FT this week, Benoît Coeuré, a member of the executive board of the ECB, said the fall in bond yields was sending a “quite alarming” message and painting a “very bleak” picture of the global economy. These warnings were underscored by new data which showed the value of negative-yielding bonds around the world had reached a new record high of $12.5t. This indicates nervousness about the state of the global economy is rising in financial markets and investors are seeking safety. A negative yield indicates that bond purchasers would make a loss if they held it to maturity.
Coeuré, who is a leading contender for the post of ECB president when Draghi steps down in October, said:

The kind of coordinated measures seen in 2008 would be more difficult to achieve today. Global co-operation is eroding. The capacity of global policymakers to deal with shocks to the global economy today is today much less than it was previously.

Trump Believes He Has the Authority to Replace Powell at Fed
Jennifer Jacobs, Saleha Mohsin, Jun 20 2019

Pres Trump has told confidants as recently as Wednesday that he believes he has the authority to replace Jerome Powell as chairman of the Federal Reserve Board, according to people familiar with the matter. In Trump’s line of thinking, he could demote Powell to be a board governor, but isn’t planning to do so right now, the people added. Their account of the president’s conversations emerged just hours after Powell said he intends to serve his full four-year term despite Trump’s continuing criticism of Fed policy. Earlier this year, Trump asked White House lawyers to explore options for removing him, Bloomberg reported on Tuesday. Trump’s frustration with Mnuchin is limited to his recommendation of Powell. Mnuchin is otherwise in good standing with the president. Trump’s attacks on the Fed are a departure from almost three decades of caution in the White House about making public comments on monetary policy, out of respect for the independence of the central bank. Powell said at a press conference in Washington on Wednesday after policy makers met to discuss interest rates:

I think the law is clear that I have a four-year term, and I fully intend to serve it.

They left the benchmark rate unchanged, while opening the door to a rate cut later this year. White House lawyers think there is a way to follow through with a demotion if that’s what the president wants, but there has been some disagreement in the Counsel’s office. White House Acting Chief of Staff Mulvaney and economic adviser Kudlow declined to comment. Kevin Hassett, departing chair of the White House Council of Economic Advisers, said when asked if Trump should demote Powell:

No. 100% he won’t do it.

Trump has repeatedly accused Powell of not doing enough to bolster the economy. The president has called for lower interest rates as he seeks to offset the headwinds created by his trade war with China and to create a favorable backdrop for his re-election campaign next year. Trump told ABC News Friday that he disagreed with Powell “entirely,” adding:

If we had a different person in the Federal Reserve that wouldn’t have raised interest rates so much, growth would have been stronger.

The Federal Reserve Act provides explicit protection for Fed governors against removal by the president except “for cause.” Courts have interpreted the phrase to require proof of some form of legal misconduct or neglect of basic duties. A disagreement over monetary policy wouldn’t meet that bar. It’s not clear whether the president can demote a chairperson from the top position while leaving them as a Fed governor.

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