U.S. Dollar Today: Trump Labels Fed a Threat to Economy but Analysts say It's Just Election Bluster

© Gage Skidmore

- Trump hits out at Fed policy for a second time in October.

- Labels Powell & Co's policy greatest threat to U.S. economy.

- But USD undeterred as economists say it's just election bluster.

The Dollar advanced Wednesday after shrugging off President Donald Trump's latest attack on the Federal Reserve (Fed), which saw him describe the central bank as the greatest risk facing the U.S. economy at the moment. 

President Trump told the Wall Street Journal it is too early to tell whether he made a mistake in appointing Jerome Powell, a lawyer by trade and former Federal Open Market Committee (FOMC) voting member, as chair of the FOMC and Federal Reserve at the beginning of 2018. 

However, Trump made clear that he wants Powell to understand he does not support the Federal Reserve, which is independent from government, and its push to raise interest rates. He also labelled the Fed's rate hiking policy the greatest threat to the economy, which has been boosted this year by one of the largest tax cuts in U.S. history. 

“Every time we do something great, he raises the interest rates...he almost looks like he’s happy raising interest rates," Trump was reported as telling the Wall Street Journal. “To me the Fed is the biggest risk, because I think interest rates are being raised too quickly.”

Wednesday was not the first time the U.S. president has hit out at the Federal Reserve and its monetary policy since the appointment of Jerome Powell to the helm back February. He made similar remarks to reporters on the White House lawn earlier in October and in an interview with Reuters back in August.

"He didn’t answer what would make him try and replace the Fed chair. By law he can only fire governors “for cause” and raising interest rates can hardly be considered a cause – whether Congress would stop him perhaps depends on whether Democrats manage to take the house [in the midterm elections]," says Elsa Lignos, head of FX strategy at RBC Capital Markets.

National leaders' attempts at interfering with the interest rate policies of central banks have rarely gone down well with the market in the modern era of central bank independence.

The 2018 implosion of the Turkish Lira, and 50% rise in the USD/TRY rate, highlights the kind of tantrum markets can throw when they get wind of interest rate policies being set in accordance with the whims of national leaders rather than economic demands. However, few if any see President Trump's comments as a genuine attemp to meddle in Fed policy. 

"President Donald Trump’s recent public criticism of Fed Chair Jerome Powell is a clever attempt to pre-emptively blame the Fed and its interest rate hikes for any future downturn in the US economy. The particular danger for him is that weakness could coincide with the 2020 election campaign, when he would be most vulnerable," says Paul Ashworth, chief U.S. economist at Capital Economics. 

The US Dollar index was quoted 0.32% higher at 96.25 during early trading Wednesday. The Pound-to-Dollar rate was 0.36% lower at 1.2931 and the Euro-to-Dollar rate was 0.49% lower at 1.1414.

The Federal Reserve has raised interest rates eight times since the end of 2015, and on three occassions since Powell was appointed in 2018, taking the Federal Funds rate range to between 2% and 2.25%. This latter tightening of policy has come alongside a pickup in U.S. growth.

U.S. GDP rose at its fastest pace for nearly four years in the second-quarter as the economy benefited from a near 50% reduction in the corporate tax rate and other measures that handed an estimated $1,200 in annual income back to the average household. 

"Both markets and the consensus are still underestimating just how quickly the economy is likely to lose momentum next year, as the fiscal boost fades and monetary tightening bites. Our below-consensus forecast that economic growth will slow to just 2.0% next year is why we expect the Fed to call time on its rate hiking cycle by the middle of next year," says Michael Pearce, another economist at Capital Economics, in an earlier note.

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