The former president of the Federal Reserve Bank of New York, William Dudley recently spiked debate when he asked the Fed to revisit their 2020 presidential election policies. From his public service, Dudley observed that Fed policy could affect politics, in some cases with extreme implications. His observations weren’t on target even though he made such observations.
William’s logic is on point because if the Fed agrees to slash down the interest rates in response trade action policies by Donald Trump, it could push the U.S president to settle on more of the same because Trump has a belief that both China and the U.S are locked in a trade war that will last for long. Trump, though agrees to the fact that the stock market affects his tariff negatively while also affecting growth that could, in turn, affect his re-election.
If the Fed decides to loosen the policy, then President Donald Trump will have the freedom to escalate trade attacks on China. Dudley says, “abundantly clear that Trump will own the consequences of his actions.”
The question, though remains, what does making it abundantly clear mean? Because the Federal officials can confirm that the president’s action is driving them to lower the interest rates to satisfy the dual mandate of having stable inflation as well as better employment. Perhaps, the government can emphasize on introducing high risk ach processing.
They have an option to lower the interest rates, which affects the living standards of Americans, but also stretch financial stability risks to encourage more yield. It, therefore, goes without saying that the Fed should pull down such consequences.
It’s also important to note that monetary loosening may not fully neutralize the negativities on trade policy uncertainties. Because it’s not possible to reverse many investments once undertaken, unless only with difficulty, and, the investments predicated may be rendered of no use if the trade war persists. Additionally, investing in local production could prove costly, mainly when predicated on the ongoing trade conflict.
Some miscalculations are unavoidable are inescapable when trade policy is uncertain. It is, therefore, a wise idea for companies to delay investing until a solution is found to the current uncertainty – in regards to the level of interest rates. The central bank must also be bold enough to let Trump know that it cannot entirely cancel out the macroeconomic influence of his trade war in as much as he would wish.
Dudley gave some provocative remarks saying, “There’s even an argument that the election itself falls within the Fed’s purview.” While this comment might have spiked a lot of criticism, Dudley didn’t hesitate to adapt to it. “Political considerations should never motivate fed officials or deliberately set monetary policy with the goal of influencing an election,” Dudley added.
AUTHOR BIO: As the FAM account executive, Michael Hollis has funded millions by using high risk ach processing solutions. His experience and extensive knowledge of the industry has made him finance expert at First American Merchant.