Washington - India's former Central Bank governor, Raghuram Rajan, warned that US President Donald Trump's attempts to influence the US Federal Reserve could have devastating effects on the economy and monetary policy.
Rajan's warning
Rajan is famous for predicting the 2008 financial crisis. At present, he is a professor at the University of Chicago Booth School of Business. In an interview Rajan said: “It could either put [the Federal Reserve’s] back up, and they could say 'no' just because you’re jawboning, even if the economy needs more accommodative policy. It could do the opposite with equally devastating effect: [Fed officials] succumb and then the view is these guys are poodles and that when in fact inflation shows up, they will not do what is necessary. Both outcomes are problematic, which is why leaders have stayed away from commenting thus far.”
Rajan claimed that it was very important that central banks such as the US Fed should be left alone by politicians to do their work. They may do unpopular things that are good in the long run because their decisions keep inflation low, and growth more stable than it would be otherwise. He said that the US Federal Reserve had a political issue on its hands and will have to deal with it as best it can.
Trump has been critical of the Federal Reserve
Trump has for months now been publicly critical of the Federal Reserve and chair Jerome Powell. Earlier in April Trump said that the Fed should slash interest rates and claimed that the Feds had slowed down the economy. In December of 2018 Trump had tweeted: “The only problem our economy has is the Fed. They don’t have a feel for the Market, they don’t understand necessary Trade Wars or Strong Dollars or even Democrat Shutdowns over Borders.”
In criticizing the Feds Trump had told reporters: “I personally think the Fed should drop rates. I think they really slowed us down. They should get rid of quantitative tightening." Trump had criticized the Federal Reserve under the Obama regime for holding down interest rate and also the policy of quantitative easing, that is buying Treasury bonds and mortgage securities to inject more liquidity into the economy. As president he is now taking more or less the opposite position.
Trump planning to nominate loyalists for the Fed's Board of Governors
The nominees are Herman Cain a former CEO of Godfather's Pizza, and Stephen Moore a fellow at the conservative Heritage Foundation. Many lawmakers and economists have questioned their qualifications. Neither has yet been formally nominated. Larry Kudlow, Trump's top economic adviser said the appointments would not be intended to undermine the traditional political independence of the Fed bank.
Kudlow said: “We are not going after their independence. We have our point of view.” Kudlow said that given that inflation is low and wages were rising: "Why raise interest rates".
Trump was angered at the Fed's interest rate increases last year. He even discussed firing Jerome Powell chair of the bank.
Previously published in Digital Journal
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