Former India Central Bank Governor warns Donald Trump not to interfere with US Federal Reserve

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

Interest rate rise by US Feds not likely to have much effect on consumer borrowing costs

(June 17) The US Federal Reserve increased short-term interest rates by a quarter point on Wednesday to an upper limit of 1.25 percent. The increase will have a quite modest impact on consumer's borrowing costs.

The increase was widely expected. If the Feds continue to keep raising rates it would be wise for consumers to adjust now for any effect such moves might have later on. Increased rates get passed on to consumers who borrows causing higher rates for all types of loans including on credit car balances and car loans.

If you are planning on getting a new mortgage or if your present mortgage is variable rate, there could be an increase in the amount you pay. It might be wise to move from a variable rate mortgage to a fixed rate. Since rates are likely to continue to rise it might be wise to take out a mortgage now rather than wait for another increase.

As credit card rates could rise, it might be a good idea to try and pay down credit card debt. If you have a student loan with variable rates you could refinance the loan at a fixed rate. However, a recent report showed over half of students who requested refinancing were turned down.

Car loan costs will rise if Federal rates continue to go up. However, at a certain point the costs of borrowing will result in unsold cars and higher inventories that could reduce prices.

While banks may raise rates on borrowing they may be slow in raising the interest they pay on accounts. They may rather keep interest rates on deposits low to boost their own bottom line. The rate now is an abysmal average of 0.11 percent the same as a year ago. You could improve the rate by transferring money you do not require to a certificate of deposit but the money would be locked in for the time of the deposit.

This is the fourth interest rate hike by the Feds in the last 18 months. The increased rates may encourage foreign investors to invest more in the country as the return is greater. The Feds foresee one more hike this year if the economy remains on a solid footing.

While the individual increases may not seem like much the cumulative effect of the four recent changes since 2015 can add up. For example, someone with a $5,000 credit car balance who makes a minimum payment each month will find the interest increase added $700 in payments over the life of the loan according to Greg McBride, an analyst at Bankrate.com. On the other hand so far home and auto loan rates have barely moved since December 2015.

The Feds believe that the inflation rate will fall below the target 2 percent rate this year. The Feds now think that US GDP growth will be 2.2 percent rather than the 2.1 forecast in March. Unemployment is expected to be at a low 4.3 percent down from the March prediction of 4.5 percent. There is also a prediction of 1.6 percent rise in personal consumption expenditures, but this is down from 1.6 in March. Core inflation, excluding food and energy, is down from 1.9 percent to 1.7 percent.