Trump to subject the Fed, challenge the ECB and make Wall St. bankers even richer

Federal Reserve Board Chair Janet Yellen addresses educators in Washington, D.C. Taken on January 12, 2017. (Federal Reserve System photo).

It’s obvious by now that the European Central Bank and its President Mario Draghi are following a diametrically opposite monetary policy than the American central bank, the famous FeD. Both Draghi and ECB Vice President Vítor Constâncio have loudly reassured everybody that the Eurozone’s central bank will continue injecting €60 to €80 billion a month into the economy. And they stress that this is to continue for as long as it sees it necessary, while keeping the basic interest rates close to zero.

At the same time the American Fed is contemplating to start getting back some of the $4.5 trillion of cash it had injected into the US economy from January 2008 until November 2015. Fed’s head Janet Yellen and her policy making council colleagues have also said that the basic dollar interest rates will continue increasing all along this year. The US central bankers also agree that the American economy is in a strong and sustainable growth path. That’s why the Fed is compelled to gradually retrieve some of the trillions it has printed in order to counter the devastating effects of the 2008 financial meltdown. To let all that money on the loose in a strong growth period may trigger a devastating hyperinflation. So the Fed is obliged to follow an overall restrictive monetary policy that is higher interest rates and cutting down on quantitative easing. There is more to all that though.

Diverging monetary policies

For one thing, this striking divergence of monetary policy in the two shores of the North Atlantic Ocean is to keep at the present low levels or further suppress the exchange rate of the euro in relation to the dollar. Currently, this rate oscillates around 1.06 but some analysts predict full parity within the year. This is to happen if the Fed does embark on a full scale restrictive policy.

Apart from increasing its interest rates, the Fed now readies to start calling back the money it has injected into the economy. This can be realized by stopping to reinvest the cash from maturing securities, the ones it has purchased during the past ten years, that is, since the first clouds appeared in the Atlantic skies during the summer of 2007. The first to feel the pressures will be the New York banks.

A portfolio of $4.5 trillion

To be reminded, the American central bank reacted forcefully with the first signs of the last financial crisis. It ejected trillions of dollars into the American economy, through purchases of securities. It still holds $4.5 trillion of such paper and the banks keep the cash. Since a few months ago, the Fed has started increasing its interest rates. It remains though to be clarified when it will also start reducing its ‘investments’ in American securities, thus reducing the $4.5 trillion cushion it has injected into the US systemic lenders.

In this way, rather sooner than later the two most important central banks of the world would be in completely opposing directions policy wise. This means the euro is to become even more cheap than the dollar, thus backing the EU exports to the US and at the same time penalizing the opposite trade flows. However, the Trump administration is complaining about the US trade deficit with the Eurozone, even at the current exchange rates between the two moneys.

Trump has openly accused the Eurozone in general and Germany in particular of exchange rate manipulation aiming at supporting exports. Obviously then, the White House must be now alarmed seeing the American central bank, the Fed, following a monetary policy which is expected to further strengthen the dollar vis-a-vis the euro, and consequently offer more advantages to European exports and penalize the American sales to the EU.

Trump’s unruly reaction

In view of that, the Trump administration has introduced legislation to undermine the independence of the Fed and subject its key policy decisions to the Congress. In this way, the White House hopes to put a stop to the Fed’s restrictive monetary plan, which strengthens the dollar and creates more disincentives for the American exports. Of course, at the same time, the Trump administration, being stuffed with ex New York bankers, opposes the restrictive monetary policy for one more reason. The US lenders will lose the abundant low cost refinancing from the Fed. As a result, the White House has started a dangerous campaign to subject the independent Fed under political control.

Understandably then, the Fed’s Chair Janet Yellen is strongly protesting the curbing of the central bank’s independence. According to Reuters, Yellen, speaking this week at the University of Michigan, said that the independence of the central bank is “very important and results in better decision-making that’s focused on the long-term needs and health of the economy”. The new legislation under deliberation in the Congress demands that the central bank follows a clear rule in setting interests rates and is obliged to justify any changes or divergence from that rule. If this legislation is voted and signed by the President, the independence of the central bank will be fully compromised.

Compromising the Fed

In short, Trump is planning to do exactly what he accused Eurozone and Germany of doing; employing exchange rate manipulation. At the same time, his team of economic advisors and his Treasury Secretary Steven Mnunchin seem not to bother, if their efforts to prolong the expansive monetary policy may lead the US economy to hyperinflation. In conclusion, the Trump administration is indifferent, if their short term political needs gravely endanger the future of the economy.

They want to be seen now as dealing with the Europeans, no matter if such a policy may retaliate badly in the future. At the same time, they also long to keep supporting the Wall Street bankers to continue making billions on free and abundant money from the Fed, at the expenses of the real economy.

 

Advertising

the sting Milestone

Featured Stings

Can we feed everyone without unleashing disaster? Read on

These campaigners want to give a quarter of the UK back to nature

How to build a more resilient and inclusive global system

Stopping antimicrobial resistance would cost just USD 2 per person a year

Silk Road Unlimited

A critical European young voice on Net Neutrality: the distance between Brussels and Washington

Malaria: Focus on pregnant women and children, stresses UN health agency report

France is building a village for people with Alzheimer’s

How to tackle the perils of air pollution

There is no greater sorrow on earth than the loss of one’s native land

Yemen consultations have started, insists top UN negotiator

Companies can help solve water scarcity. Here’s how

Civil protection: Parliament strengthens EU disaster response capability

UN Envoy ‘confident’ deal can be reached to avert further violence around key Yemeni port city

These are the countries where most adults still don’t have a smartphone

Have Europe’s Ukrainian wounds begun to heal?

UNICEF delivers medical supplies to Gaza in wake of deadly protests

Commission concludes that an Excessive Deficit Procedure is no longer warranted for Italy at this stage

Innovation for a smarter world: ITU Telecom World 2018

We need better alignment between climate and trade. Here’s a roadmap

State aid: Commission approves €400 million of public support for very high-speed networks in Spain

The Indian case: health policies need to keep pace with public health literacy

Sochi not far away from Ukraine

First-ever EU defence industry fund to finance joint development of capabilities

We don’t know how autonomous vehicles will depreciate – and that’s a problem

Banks promise easing of credit conditions in support of the real economy

Making money from meeting the SDGs? An overarching approach to sustainable development.

Guterres calls for ‘maximum restraint’ following drone assault on key Saudi oil facility

Violence against women a barrier to peaceful future for all

Further reforms can foster more inclusive labour markets in The Netherlands

Portugal: Budget MEPs back €4.66 m in job-search aid for 730 redundant workers

European Development Days 2013

Young people demand a transparent job market: new campaign launches on international interns day

How digital can transform healthcare in Asia for millions of people

How supporting climate action on a local level can transform the world

Consumer protection: Deal on EU-wide rules for those sold faulty products

It’s a lie Eurozone isn’t competitive

EU’s unsparing question to UK: now what kind of future relations do you want?

Your chocolate can help save the planet. Here’s how

Refugee resettlement: ‘Tremendous gap’ persists between needs, and spaces on offer

The Sting’s Values

Development aid drops in 2018, especially to neediest countries

Security Union: political agreement on strengthened Schengen Information System

General Assembly officially adopts roadmap for migrants to improve safety, ease suffering

Thought AIs could never replace human imagination? Think again

INTERVIEW: Poverty, education and inclusion top new General Assembly President’s priority list

What is ‘South-South cooperation’ and why does it matter?

A Sting Exclusive: Disaster risk resilience, key to protecting vulnerable communities

JADE @ European Business Summit 2014: Youth Unemployment – a drive to Entrepreneurship

6 ways to future-proof universities

Member states jeopardising the rule of law will risk losing EU funds

Tuesday’s Daily Brief: #GlobalGoals progress, essential meds, updates from Cox’s Bazar, Sudan and DR Congo

The European Union’s Balkan Double Standard

Strengthen inclusion, participation of people with autism to ‘achieve their full potential’ says UN chief

How to provide health education and thus create better health systems

EU Council agrees to reform the system for motor vehicles but with “restricted” power for the Commission

This is how music festivals are tackling plastic waste

The EU Commission is lying to the “Right2Water” campaign

A Valentine’s Special: giving back, a dialogue of love

ILO welcomes new UNDP report that places decent work at the heart of sustainable development

Everybody against Japan over yen’s devaluation

How is the global economy fairing 11 years after the financial crisis?

Launch of Pact for Youth: European Youth Forum calls for real business engagement

3 natural mysteries that could be explained by quantum physics

More Stings?

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s