Open Letter Regarding Fed Independence

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Former Fed Leaders Speak Up

In an unprecedented move, four former Fed members have published an open letter in the Wall Street Journal calling for the independence of the central bank to be maintained.

The four signatories were former Chairmen Paul Volcker, Alan Greenspan, Ben Bernanke, and Janet Yellen.

The letter comes in the face of ongoing criticism from President Trump of the Fed. And, as a result, growing concerns regarding the independence of the Fed.

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The Letter

The letter reads:

“As former chairs of the board of governors of the Federal Reserve System, we are united in the conviction that the Fed and its chair must be permitted to act independently and in the best interests of the economy, free of short-term political pressures and, in particular, without the threat of removal or demotion of Fed leaders for political reasons.

Collectively, we served our nation across nearly 40 years and were appointed and reappointed by six presidents, both Republican and Democratic. Each of us had to make difficult decisions to help guide the economy toward the Fed’s legislated goals of maximum employment and stable prices. In retrospect, not all our choices were perfect. But we believe those decisions were better for being the product of nonpartisan, nonpolitical assessments based on analysis of the longer-run economic interests of U.S. citizens rather than being motivated by short-term political advantage.

The Fed’s nonpartisan status doesn’t mean it is unaccountable. Congress sets the Fed’s powers and charges it with maximizing employment and promoting stable prices. The chair and other Fed leaders testify before Congress and speak regularly in public, explaining their views of the economy and how they plan to meet their mandates. Presidents, members of Congress, financial-market participants, pundits and many private citizens advocate that the Federal Reserve make particular monetary policy decisions. In our system of government, that is the right and privilege of every person, one we don’t question. The Fed welcomes open dialogue, as evinced by the “Fed Listens” program, in which Fed leaders have engaged with the public about possible changes to the Fed’s policy framework. A robust public debate helps make monetary policy better.

History, both here and abroad, has shown repeatedly, however, that an economy is strongest and functions best when the central bank acts independently of short-term political pressures and relies solely on sound economic principles and data. Examples abound of political leaders calling for the central bank to implement a monetary policy that provides a short-term boost to the economy around election time. But research has shown that monetary policy based on the political (rather than economic) needs of the moment leads to worse economic performance in the long run, including higher inflation and slower growth. Even the perception that monetary-policy decisions are politically motivated, or influenced by threats that policy makers won’t be able to serve out their terms of office, can undermine public confidence that the central bank is acting in the best interest of the economy. That can lead to unstable financial markets and worse economic outcomes.”

Will Trump Intervene?

The timing of this letter is interesting. Speculation has increased lately regarding potential US currency intervention thanks to Trump’s ongoing criticism of the Fed.

Trump has publicly criticized both the central bank and Chairman Powell personally on several occasions. His main call has been for the Fed to help weaken the dollar.

More recently, there has been talk of Trump taking matters into his own hands. White House adviser Larry Kudlow told CNBC that although it had been discussed, currency intervention had been ruled out.

However, Trump then took to Twitter to refute that statement. The President reaffirmed that they had not ruled out intervention, leaving the market in limbo.

China Weakens CNH

China has just weakened its currency against the USD to its lowest level since the GFC in 2008. In light of this, the prospect of US currency intervention is likely to come up once again.

Trump has been facing increased criticism recently over his approach to the Fed.

The central bank’s outlook and assessment have shifted dramatically this year. Expectations of rate hikes earlier in the year have transformed into rate cuts as we saw at the July meeting. In light of this, there are clear concerns over the role the President might have played in this shift.

Technical Perspective

The weakening in CNH has seen USD rallying up to highs of 7.13905, levels not seen since 2008. While above the key 7 level, focus remains on further upside in the near term. However, we are seeing some retracement today. The move above 7 is a major development and the risk of US currency intervention is high. To the downside, support comes in at the 7 level with 6.8982 below, where we also have the rising trend line from 2018 lows.

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