Trump, the Fed and Us

As planned, the U.S. Federal Reserve lowered benchmark interest rates by a quarter of a percentage point yesterday. Although the move was expected, it was nevertheless unusual and has raised a number of questions.

“They’ve been well telegraphed,” Fed Chairman Jerome Powell said during a press conference yesterday afternoon.

Sure enough, Powell was left with no other choice. In June, he promised that the Federal Open Market Committee would “act as appropriate to sustain the expansion,” and this justification was used on numerous occasions yesterday.

Lowering interest rates is meant to ease credit conditions for private individuals and companies, which in turn is supposed to stimulate the economy. It’s therefore common for central banks to lower interest rates to counter a recession or slowdown. Except that at this time, the U.S. economy is doing very well, thank you. The Fed chairman explained that the cuts serve instead as “insurance” against “weak global growth and trade tensions.”

Although this reasoning is simple enough, Powell struggled immensely to defend the policy, and Donald Trump didn’t make the task any easier for him.

The Fed was viewed as independent as long as it raised interest rates or left them unchanged. So why is it lowering them now, when nothing other than the U.S. president’s repeated calls to do so seems to justify such action?

Powell stressed that the Fed’s board of governors “never take[s] into account political considerations” or “conduct[s] monetary policy in order to prove [its] independence.”

Anticipating questions about the person behind this unfortunate atmosphere of uncertainty, he also said, “We’re not in any way criticizing trade policy. That’s really not our job.”

At the end of the press conference yesterday, there were at least two things beyond doubt: the Fed’s independence and the danger of the U.S. leader getting involved in its decision-making. Ultimately, what’s the purpose of having a central bank that we can no longer trust?

Fortunately, Trump lent a helping hand that was as unintentional as it was unexpected … by being his usual self. On Twitter, he complained, “As usual, Powell let us down,” criticizing him for not having announced a long series of rate cuts.

The Fed chairman’s strategy does raise questions, but if there’s one thing we can’t criticize him for, it’s for having obeyed the current occupant of the White House!

However, other questions remain unresolved, particularly on the Canadian side of the border, where people now have to wonder at what point the Bank of Canada will also feel compelled to lower benchmark interest rates. According to Eric Lascelles, chief economist at RBC Global Asset Management Inc., “If the Fed lowers them three times in 2019, it’s possible that the Bank of Canada will end up cutting rates around the close of the year.”*

How much longer can the Fed’s preventive economic stimulus hold off the next recession? Above all, is it really reasonable to let consumers and companies know that low interest rates are here to stay?

By boosting growth in such a way, in the hope of keeping it alive as long as possible, isn’t the United States running the risk of creating a new kind of bubble, one that could be as brutal as those that burst before it?

Of course, we don’t want this to happen to our neighbor and main export customer, but we’ve got to keep our eyes open.

*Editor’s note: This quotation, accurately translated, could not be verified.