The Power of the Dollar: What Politics Will Trump’s Appointment Choose?

Jerome Powell will take over in February.

He is a lawyer by education and one of the richest Fed chairmen: his fortune is estimated at $ 19.4-55 million. 

The price of his decisions will determine the trajectory not only of the United States, but will also affect the value of assets in other economies, including Russia

The US Senate Banking Committee voted for Jerome Powell’s candidacy almost unanimously (22 vs 1).

Under his leadership, the Fed is not likely to make sharp movements in monetary policy issues that could adversely affect the US economy and the global economy as a whole.

Changing the leadership of the Fed, which was initiated by Donald Trump, was a matter of time. Since the beginning of his presidency, the US president has often expressed dissatisfaction with the policies of the former head of the Federal Reserve, Janet Yellen, who has long maintained the base interest rate at 1–1.25% per annum. Trump’s logic was that the current rate lag behind the inflation rate, the expectations indicator (UIG) which is close to the level of 2.8%, creates the risk of further price increases. However, later Trump began to talk about the need for a soft monetary policy and a low interest rate for further growth of the American economy.

The US Senate Banking Committee voted for Jerome Powell’s candidacy almost unanimously (22 vs 1). Under his leadership, the Fed is not likely to make sharp movements in monetary policy issues that could adversely affect the US economy and the global economy as a whole.

Powell can be called adherent of a loose monetary policy. Another thing is that many consider this softness ambiguously in the context of maintaining the Fed’s independent position on monetary policy issues, as it is a protege of Donald Trump. There is an opinion that Powell will listen to the words of the President and members of the US Congress, trying to follow a line that would suit the presidential administration. However, such flexibility is fraught with undermining the confidence of market participants.

The US Senate Banking Committee voted for Jerome Powell’s candidacy almost unanimously (22 vs 1). Under his leadership, the Fed is not likely to make sharp movements in monetary policy issues that could adversely affect the US economy and the global economy as a whole.

Between public debt and inflation

Before the new head of the department will be difficult tasks. Powell will take matters to the Fed at a time when the United States has the highest level of government debt in history and all-time low base interest rates. The pre-crisis unemployment rate, the growth of the US economy by more than 3% over the past year, and the update of the American highs by the US indices speak in favor of a further increase in the Fed rate, but low inflation and high debt limit the regulator’s abilities. And although an analysis of the situation in the short term suggests that there is no need for short-term incentives, however, on the horizon of 5-10 years, these problems can put a lot of pressure on the economy. In this situation, the Fed is forced to act very cautiously: slowly raise the interest rate and adjust the indicators on which it relies when making decisions about changes in monetary policy.

Insurance against the threat of slowing the economy Powell has. It’s about Trump’s steps to enter into new trade deals (trade agreements) with major US trading partners and tax reform. For the conclusion of trade deals need a relatively weak dollar.

The Fed’s policy this year is aimed at a looser monetary policy, which helped to weaken the dollar after the dollar basket reached a 15-year high at the beginning of the year. A weak dollar creates more favorable conditions for the export of products to American manufacturers and helps to conclude profitable trade agreements with major US trading partners. Fiscal reform, in turn, may further support the US economy if the world economy starts to slow down.

What is the price of a permanent postponement increase? How will inflation expectations change in response to the rising cost of money? And how will the markets react when the outpacing price increases and the rising cost of labor in the US begin? How will corporations react to this? And then respond to the slowdown in the economy? Answers to these questions will have to give Powell in the near future.

Long-term preservation of a soft monetary policy may lead to the emergence of new bubbles and distortions in the economy. When artificially low rates are created, while unemployment is at a historically low level, inflationary expectations begin to rise. In these conditions, the availability of cheap loans creates a situation where assets in the market can be significantly overvalued. Now the same thing can happen. Unemployment is already at 0.5% below the Fed’s expectations. If the labor market continues to recover further, the Fed will be forced to continue to tighten monetary policy.

 

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