Has the Fed Gone Crazy?

Donald Trump is the President of the United States. However, he has just discovered that he does not have absolute power over the economy of the United States. He has just found out that a shadowy quasi-government body of unelected officials called the Federal Reserve has a lot more power and influence than most people would imagine. Officially, the Federal Reserve is the central bank of the United States. Finance and government are to be kept separate. Hence, Donald Trump and his government have very little say about the decisions made by the Fed.

Trump has been publicly showing his displeasure with the Fed’s decisions for a long time now. However, of late, he made a public statement wherein he said that the Fed has gone crazy. This started a debate regarding whether the actions being taken by the Fed are too harsh. In this article, we will have a closer look at the debate over the recent actions of the Fed.

Trump’s Remarks

The Nasdaq and all major stock exchanges in the United States are facing a slowdown. The Dow had dropped more than 2% on that particular day when Trump was asked for his comments. Trump laid the blame on the Fed stating that it was the “crazy” actions of the “loco” Fed that was causing this mayhem in the stock markets.

Background of Trump’s Remarks

After the fall in stock market values, reporters from all over the world started questioning Trump’s policies. They were of the opinion that Trump’s policies have led to a trade war with countries like China and this caused the downfall. Trump firmly believes that his policies are not to blame. Instead, the knee-jerk reactions being taken by the Fed are to blame. For instance, the Fed had already planned that there will be three rate hikes in the year 2018. However, all of a sudden, they decided that inflation was going out of control and hence included a fourth hike ad-hoc. Trump believes that these increasing interest rates are negatively impacting businesses in the United States. Since he is generally an outspoken person, Trump has put his thoughts in a crude way stating the Fed seems to have gone crazy.

Has the Fed Really Gone Crazy?

Trump’s words have brought the actions of the central bank into question. Many people are of the opinion that if the actions of the Fed are indeed hurting the stock market, shouldn’t the Fed just change its actions. Now, what these people forget is that the Fed is not supposed to serve the interest of stock market investors. That would make it biased. The Fed is supposed to stay unbiased and act in the interest of the entire economy in general. The last time interest rates were raised, the criticism was warranted. This is because the rates were raised prematurely by Janet Yellen. However, this time the inflation has started running out of control and a rate hike was long overdue.

All the central bankers of the world know that a decade of monetary loose monetary policies has created an artificial boom. The problem with Donald Trump is that he has started equating the stock market with the health of the overall economy. On several occasions, Trump has personally taken credit for the stock market rise.

Trump is trying to use any numbers that he can find in order to back the claims being made by him. The problem is that when the markets fell, the media started holding Trump personally responsible for the same. If he can be held responsible for the rise, he should also be held responsible for the fall. However, Trump tried to deflect the blame stating that the Fed had gone crazy leading to the fall in the markets.

The intent of Donald Trump is very clear. He wants to massage the numbers in a way that make him look good. This is the reason why he wants the Bull Run to continue even if it meant runaway inflation for the entire economy. Thankfully, the Fed is an independent body which does not need to take into account the whims and fancies of the President.

Were the Past Recessions Caused by the Fed?

Trump’s debate is centered on the point that the Fed needlessly raises interest rates to cause a recession. For a minute, let’s believe that this is indeed the case. Still, the Fed is far away from the point where it could cause a crisis. During 2008, the interest rate was close to 5.5%. On the other hand, when the dot-com bubble went bust, the interest rates were raised to 6.5%. At the present moment, the interest rates are close to 2% or so. The Fed still has a long way to go when it comes to raising interest rates high enough so that it can cause a crisis.

Now, it needs to be understood that the Fed does not cause the crisis by raising rates. It is the investments that were made when the interest rates were low that cause the crisis. It is the duty of any central bank to raise interest rates when inflation goes high. Businesses have to be mindful of the fact that the interest rates may change with time. They must have some leeway, some sort of buffer built into their budget so that an immediate rise in the interest rates does not take them under water.

To sum it up, President Trump’s comments are politically motivated. There is very little economic truth behind his comments.


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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.


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