President Trump criticizes his new Fed Chair Jerome Powell for accelerating the current interest rate hike.

Joseph Corr

2018-08-21 11:40:00 Tue ET

President Trump criticizes his new Fed Chair Jerome Powell for accelerating the current interest rate hike with greenback strength. This criticism overshadows the murky independence of the U.S. Federal Reserve System.

Monetary policy independence often contributes to the real effects of incremental interest rate adjustments on economic output, employment, and capital investment. This political independence is important with respect to the Lucas-Sargent-Wallace monetary invariance principle. This monetary invariance principle suggests that if only unpredictable money supply changes move real economic variates, monetary policy decisions that generate systematic or predictable variation in money supply would have no real impact on economic variates such as output, employment, and consumption. The subsequent relevant real business cycle (RBC) model variants play an important role in the key analysis of time inconsistency of optimal monetary policy conduct. Central bank independence and credibility thus become important institutional determinants of what constitutes effective monetary policy decisions.

A recent Oxford Economics research note by Alberto Alesina and Larry Summers affirms the empirical fact that most OECD countries experience high inflation (and maybe high unemployment) with subpar monetary policy independence. Several past examples of political influence over monetary policy decisions relate to the Nixon and Bush administrations.

For instance, President Nixon swapped out Former Fed Chair William McChesney Martin with his presidential pick Arthur Burns. The Nixon tapes revealed numerous conversations between Nixon and Burns where Nixon required the Fed chairman to keep low interest rates in order to maintain high employment in the 1970s. Nixon even indicated to his advisers that the administration could tolerate inflation but not high unemployment. As he tried to tilted the New Keynesian Phillips Curve (NKPC), Nixon's subsequent monetary policy stance proved to be disastrous as it ushered in a multi-year period of stagflation (i.e. high inflation, high unemployment, and low economic growth).

Later President George H.W. Bush often complained about the hawkish monetary policy decisions of his Fed chairman Alan Greenspan in the early-1990s. However, these complaints were less aggressive as Greenspan was able to assuage the dovish concern and suspicion that several senators shared back then.

At Jackson Hole, both Kansan City and Cleveland Fed CEOs Esther George and Loretta Mester point out that it is unlikely for the Trump administration to prevent subsequent interest rate hikes after mid-2018. Most monetary policy pundits and experts now predict one interest rate hike in September 2018 and another hike in December 2018. This prediction accords with the Wall Street consensus among top investment banks such as Goldman Sachs, JPMorgan Chase, Citigroup, UBS, and Bank of America.

 


If any of our AYA Analytica financial health memos (FHM), blog posts, ebooks, newsletters, and notifications etc, or any other form of online content curation, involves potential copyright concerns, please feel free to contact us at service@ayafintech.network so that we can remove relevant content in response to any such request within a reasonable time frame.

Blog+More
Chinese Belt-and-Road funds large international infrastructure investment projects primarily in East Asia, Central Asia, North Africa, and Italy.
Fiona Sydney

2019-04-15 08:37:00 Monday ET

Chinese Belt-and-Road funds large international infrastructure investment projects primarily in East Asia, Central Asia, North Africa, and Italy.

Chinese Belt-and-Road funds large international infrastructure investment projects primarily in East Asia, Central Asia, North Africa, and Italy. Chinese Be

+See More
Facebook, Twitter, and Google executives explain the scope of Russian interference in the U.S. 2016 presidential election.
Apple Boston

2017-09-19 05:34:00 Tuesday ET

Facebook, Twitter, and Google executives explain the scope of Russian interference in the U.S. 2016 presidential election.

Facebook, Twitter, and Google executives head before the Senate Judiciary Committee to explain the scope of Russian interference in the U.S. presidential el

+See More
Apple adds fresh features to its new iPad Pro and MacBook Air in addition to its prior suite of iPhones.
Joseph Corr

2018-11-03 11:36:00 Saturday ET

Apple adds fresh features to its new iPad Pro and MacBook Air in addition to its prior suite of iPhones.

Apple adds fresh features to its new iPad Pro and MacBook Air in addition to its prior suite of iPhone XS, iPhone XS Max, and iPhone XR back in September 20

+See More
We can learn much from the frugal habits and lifestyles of several billionaires.
Joseph Corr

2016-10-01 00:00:00 Saturday ET

We can learn much from the frugal habits and lifestyles of several billionaires.

We can learn much from the frugal habits and lifestyles of several billionaires on earth. Warren Buffett, Chairman and CEO of Berkshire Hathaway, still l

+See More
Treasury Secretary Steven Mnuchin indicates that there is a good conceptual trade agreement between China and the U.S. in regard to intellectual property protection and enforcement.
James Campbell

2019-10-05 07:27:00 Saturday ET

Treasury Secretary Steven Mnuchin indicates that there is a good conceptual trade agreement between China and the U.S. in regard to intellectual property protection and enforcement.

Treasury Secretary Steven Mnuchin indicates that there is a good conceptual trade agreement between China and the U.S. in regard to intellectual property pr

+See More
America and China cannot decouple decades of long-term collaboration in trade, finance, and technology.
Becky Berkman

2019-12-16 11:37:00 Monday ET

America and China cannot decouple decades of long-term collaboration in trade, finance, and technology.

America and China cannot decouple decades of long-term collaboration in trade, finance, and technology. In recent times, some economists claim that China ma

+See More