Why does Trump print the Federal Reserve for rates?



Noah Smith – Bloomberg News.

The president seems to support the idea that manipulation of prices could weaken the dollar, which in turn would help him gain the upper hand in the trade war with China.

The modern macro economy gives great value to the idea of ​​an independent central bank. Sitting above and beyond the political scuffle, it is assumed that the wise members of the central bank should use interest to steer the economy between the dilemma of inflation and that of the recession.

President Donald Trump has little knowledge of modern macroeconomics. In private statements to the sponsors and again in an interview, the president regretted that his representative, the President of the Federal Reserve, Jerome Powell, was too quick to raise interest rates amidst the acceleration of the economy of the United States. States.

Also read: Trump confirms that a commercial agreement with Mexico "can be reached quickly"

Why does Trump worry about interest rates? Although Powell has raised rates five times, they are still low compared to historical standards.

One of the reasons why Trump is upset is that he believes that low interest rates help him win his trade war. This could be because Trump wants a weaker dollar. When the rates are low, the money tends to flow from the US according to standard theory. to places that offer better returns. This capital outflow requires the sale of the US currency, causing the value of the dollar to fall, making American exports cheaper and imports more expensive. Another reason might be that Trump wants low interest rates to offset the economic damage of the trade war. US manufacturers will be affected by taxes on steel and other inputs, while American farmers will be hit by reprisals from China and other countries that suffer from Trump's aggressive policy. This can cause a delay or a recession that – rightly – would be attributed to Trump. That is why it makes sense that you want low interest rates to boost the economy and help you deal with the storm.

But there is another reason why Trump wants to put pressure on the Fed to keep interest rates low. Even worse than the commercial war is the economic cycle itself. Speed ​​increases, even the most modest, could reveal the weaknesses of the American economy. and curb the current economic expansion.

Historically, this has been a long time since the US. It was in recession. According to some theories, long-term expansions usually lead to an accumulation of uncollectable debts in the system, which eventually fall into default and drag the country into recession.

Research shows that when the spreads between risk and treasury bonds become smaller, there is often a delay, although not always, within two years. And since this year those spreads seem pretty low.

The question that automatically follows is: where can a bad debt accumulate? Recently, during a debate with the undersigned, Conor Sen of Bloomberg Opinion suggested that the answer could be found in the balance sheets of American companies. Although financial companies still have fewer debts than before the financial crisis, the non-financial debt of companies reaches a record level as a percentage of the gross domestic product.

Jeff Spross from The Week has an excellent article that is even more worrisome. Not only does the corporate debt increase, but also the share of risky debts in the system.

Research also shows that risky debt is a predictor of the threat of economic danger. Although the issuance of traditional high-risk debts has decreased, other types of risky corporate loans are increasing. The increase in loans with leverage, which are loans to companies that already have many outstanding debts, more than compensate for the decline in junk bonds.

Leverage increases the risk, and even a company that looks healthy and has a proper credit rating can be forced to pay a short delay if its debt is too high.

In addition, medium-sized bond bonds are slightly better than "rubbish" and can easily achieve that rating if circumstances only deteriorate a little – increases and is 120 percent higher than in 2011. Added to this is the indebtedness of really safe companies decreased. As Danielle DiMartino Booth or Bloomberg has pointed out, this means that the total market for corporate debts now looks very risky.

At the moment, profits are high, allowing companies to support high interest payments that demand their huge and growing debt to resolve. However, it is unlikely that this unstable situation will last forever. An economic slowdown, or an increase in interest rates – making debt more difficult to pay back – could lead to US companies with high debt levels. And then a high debt ratio would strengthen the seriousness of the recession.

Of course Trump wants to avoid that scenario, which would further lower his approval percentages and probably lead to an electoral advantage for the Democrats. The immediate threat of a wave of corporate offenses could be one of the reasons why the president roars against the Fed to keep the party going.


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