By the time you read this piece, the writing on the interest rate wall will be clear. The US Federal Reserve Board is likely to announce a cut. But more importantly, the event will represent the Board’s guts. Will it stand united against a berating US President Donald Trump, who wishes to impose himself and dilute its sanctity and autonomy, or will it give in, and start the process of the destruction of an institution? In the past few months, the president has pressured the Federal Reserve (Fed) to announce a deep reduction, 0.5 per cent, in interest rate. A fed-up Fed has stuck to no cuts in the recent past, and a possible 0.25 per cent cut this time. Both sides have their arguments in place.
According to Trump's tough stance, the economy is strong, inflation has not gone up too much despite the tariffs, and the jobs market has not cooled off as much as expected. He feels that this is a perfect time to use monetary policies, or lower interest, to kickstart the economy, boost investments, increase capacities, and let the factories produce in full flow. Lower interest will reduce EMIs, put more money in the households’ pockets, and enhance spending, which will propel the industry to produce more, and add to GDP growth. The president’s thinking reflects more of politics than economics, hope than practicality. Politicians are more interested in wooing the public to get their sympathy, empathy, support and loyalty for obvious reasons.
Jerome Powell, the Federal Reserve chair, who heads the Board, represents the diehard technocrat-economist, who is a lawyer, and has worked as an investment banker. He believes that inflation is higher than the Fed’s target, and the jobs market is in a slight turmoil. A higher reduction in interest rate at this juncture is fraught with problems. The process can begin, and continue over the next few months. The full impact of the tariffs, on prices, jobs and growth, will be felt over the next few months. It is better to wait-and-watch, and take decisions slowly, based on new facts. It is a Bayesian mindset. Incidentally, this will be the first interest rate cut this year, after a series of reductions in the previous year, and the stakeholders are reconciled to it.
Since there is no meeting ground, although both sides favour a lower rate, unlike cases where the stances are opposite, Trump tried his best to undermine the Fed through political antics. It was a two-pronged surreptitious, yet public, maneuver that succeeded partially, and may not make a difference to the decision related to interest rate. In a jiffy, the president sacked Lisa Cook, a Federal Reserve Governor, and member of the Federal Reserve Board, which took the decision. He appointed a new member, Stephen Miran, to replace her. However, the courts nixed the former, and Cook was allowed to attend the meeting, and vote on the rate cut. Miran’s appointment was pushed through in great haste, within days, through the Senate, which narrowly voted 48:47 in his favour. He too got the vote at the rate meeting.
One vote in favour, one against. Hence, the vote composition was not disturbed, and Powell’s backed decision seemed intact because it still enjoyed a majority. Minus Cook, and plus-Miran, Powell’s equations may not have worked. In such a scenario, Trump may have forced the chairman’s hands, and pushed him to agree to a higher cut. However, this may not happen this time. We are not sure about the future as the president has announced that he will oppose Cook’s court decision at the Supreme Court. Normally, Fed Board’s decisions are unanimous, or near-unanimous. This time, the votes may be split, and the meeting may be tense and loud, with verbal and loud-decibel debates. The public verbal battles between Trump and Powell will reverberate inside the Board’s meeting room, and echo back into the public domain.
Wars on monetary issues between the governments-in-power and central banks are not new. Neither in the developed world, nor in the emerging markets. In India too, the governors of the Reserve Bank of India (RBI) have tussled with the finance ministers, and vice versa, largely on interest rates. The issues are the same. The ministers want deeper cuts to stoke and excite the economy, and let the animal spirits free. The governors are careful and conservative, and want the situation to be near-perfect before they take the decisions. In the past decade or so, at least two RBI governors have quit because of verbal warfare. Powell has stuck to his guns. So has Cook, as have Trump, and his supporters. Watch this space for more news on the spat.