U.S. President Donald Trump has targeted Federal Reserve Chair Jerome Powell over potential rate cuts, threatening to fire him unless the Fed slashes interest rates by more than 3 per cent.
The President’s criticism of Powell has escalated in recent weeks, with Trump waving a draft letter during a meeting with lawmakers last week. If carried out, the cuts would be an economic earthquake that could send shock waves through Canada’s housing market and hurt the loonie.
However, experts warn that such a move would be profoundly risky for the U.S. economy, which is not in crisis. Unemployment is low, and inflation has fallen over the past year. A massive rate cut would also increase borrowing costs if it signals rising inflation.
Moreover, most federal debt is locked in, and reducing interest rates on US$26-trillion of untouched debt would be a unilateral revision of the Fed’s mandate. Political interference with monetary policy can lead to higher rates and short-term economic pain.
Canada should care about the potential fallout from Trump’s plan, as the two economies are closely linked. A weakened U.S. dollar could affect the loonie, while Canadian exporters, importers, and investors would face uncertainty due to trade tensions.
The Bank of Canada needs a clear and credible plan to keep its economy out of Washington’s drama. The central bank should reaffirm its independence with a strong public message that monetary policy is not up for political negotiation.
In history, President Richard Nixon leaned on former Fed Chair Arthur Burns to keep rates low ahead of the 1972 election, leading to inflation and subsequent rate hikes. Trump’s plan could have similar consequences, threatening global markets and Canada’s economy as well.
The Bank of Canada has built a strong reputation with its inflation-targeting framework since adopting it in 1991, but even this credibility may be shaken by Trump’s interference. Governor Tiff Macklem deserves credit for keeping the central bank’s focus on price stability, not politics.
Source: https://www.theglobeandmail.com/business/commentary/article-trumps-war-on-fed-chair-jerome-powell-could-roil-canada-and-your