Have the Fed acted on its emotions?

The long-awaited decision is finally released! The Fed kept the rates intact, putting an end to the series of rate cuts which was definitely not based on economic reasons. As a matter of fact, the Fed should have already decided to end rate cuts but things went down in the meantime have stopped the Fed from making this decision.

Let’s take a moment to look back: the funny dialogues between the Fed Chair and Trump as well as the short history of FOMC decisions were covered by the media in a quite amusing way. Here’s my interpretation of these pieces of news.

Jerome Powell took office as Chair in February 2018. Succeeding Janet Yellen, who was the first woman to hold the position, POWELL made history by cutting rates 3 times in a row. According to pre-meeting comments, he would start monitoring the economy in 2020 after a final rate cut.

To be honest, when considering all things within a rational point of view, the Fed had no reason at all to cut rates. However, when the Fed was driven into a corner by jointly political and market actors, experts’ ability to make spot-on comments has suddenly disappeared. Especially if they (those who used to claim that rates would go down) did not have solid psychological, sociological and political foundations to support their argument, I regret to say that they are nothing but guessers.

“It’s time for the White House to speak…”

Only 24 hours before the decision, most people were expecting that Fed officials to keep rates unchanged. As you may remember, the Fed had reduced rates to a target range of between 1.50% and 1.75% in October, following previous cuts in July and September. Even the Federal Reserve Chair Powell said, “The U.S. economy faces some risks to growth but remains in a good place overall” at a conference at the central bank’s headquarters in Washington. But, no matter what you cannot make people happy.

Despite the fact that he was heavily criticised, even insulted by the U.S. President Donald Trump, POWELL has also said that he was very worried about amount of US debt. As a matter of fact, the federal government owes a massive sum of outstanding debt. Even though interest rates are low, a larger debt also affects the deficit, because of higher interest payment.

In September, Trump said “Fed ‘boneheads’ should cut interest rates to zero ‘or less”, claiming that the Federal Reserve’s monetary policy strategy was doing damage to private sector. But, the U.S. business world has no complaint whatsoever about the interest rates. In the meantime, Trump asked his advisors how to remove Powell as Federal Reserve Chair before his term expires in 2022. That is to say, all members of the Board of Governors, including the Chair of the Board of Governors of the Federal Reserve System, are exposed to political pressure.

The critical point here is that Powell should avoid choose his actions, not his feelings, in his attempts to manage Trump or to show that he disapproves him, which mean the Fed Chair must absolutely avoid making a decision just to prove that he’s powerful or to harm Trump’s popularity, especially when there’s only one year left to US election 2020.

Now that the decision is released, Powell should better get ready for a series of sharp statements from the White House over the upcoming period.

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