Tuesday August 21, 2018
What seems dumb can be dangerously smart

Many people think Donald Trump is a blustering idiot, but that doesn't mean everything he does is dumb.

Take his recent criticism of the Federal Reserve's decision to raise interest rates for the seventh time since 2015. The Fed's chair is Jerome Powell, a Trump appointee and in theory the president is supposed to respect the Fed's independence (see Daily Mail) so this seems like yet another case of Trump putting his foot in his mouth. But is it?

The up side of an interest rate rise is that it makes things better for savers and stops the economy over heating. It keeps the inflation rate down.

The down side is that foreign investors think higher rates make it more attractive to have savings in the dollar and this tends to increase the value of the currency. If, like Trump, you are betting the shop on an export led boom, this is not a great position to get yourself into.

A more expensive dollar makes it harder for exporters and encourages importers to come into your markets.

But when Trump seemed to go to war with his own man at the Fed, this caused great consternation amongst traders and the dollar actually went down instead of up. From Trump's point of view that's a result.

The people who voted for him in the rustbelt states may not agree since it will increase the price of everyday objects, or at least the ones that are imported into the USA. However, most will probably not understand the finer points of the economics.

His attack also provides a stonking alibi should his boast that the American economy will grow at 3-4% thanks to his policies, fail to materialise (see CNBC). All he has to do is say 'I told you it was dumb to keep increasing interest rates'.

Of course, Trump was following in the footsteps of the Governor of the Bank of England Mark Carney, who took the strange step of going onto Radio 4's Today programme to warn that the risk of a 'no deal' Brexit was 'uncomfortably high' (see BBC) just after announcing an interest rate increase from 0.5 to 0.75%. The pound fell almost immediately.

This kind of strategy may seem smart but is it legal? Currency manipulation by the very people who are supposed to be in charge of it, is very similar to directors talking their shares up or down. This can be a criminal offence.

Posted by Jonathan Brind.
Tuesday August 21, 2018