On Fed independence under Trump – Commerzbank

In the past, I have sometimes accused the ECB of being too political. Especially during the eurozone crisis, and objectives beyond the legally mandated focus on monetary policy shone through. And in this sense, the Fed could become more like the ECB, or even far surpass it. At least if the ideas of the presidential candidate Donald Trump were to become reality, notes Ulrich Leuchtmann, Head of FX and Commodity Research at Commerzbank.

Trump is set to be USD negative

“Trump appears to be wielding disastrous political influence over the Fed. Because the ability to print money is something very special, experience as a real estate mogul does not help in the central banker job. Not a bit. And monetary policy that is based on feelings is always and everywhere doomed to failure. I can think of no one less competent to have a say in the formulation of US monetary policy than Donald J. Trump.”

“I think there is a residual risk that Trump will fundamentally restructure the institutions of the United States if he takes power. For the US dollar (USD), the US president having a say in the Fed’s interest rate decisions would be the worst case scenario. In concrete terms, in such a scenario we are not talking about a few pips of USD weakness (in EUR/USD units), but – at least in the medium term – about tens of high figures.”

“Everything we already see inflationary in the US economy and everything inflationary that a Trump administration would produce on top of that would no longer be positive for the USD, but negative. Tariffs, tax reductions, etc. there would then be signs of a loss of purchasing power for the USD. And because USD weakness would be inflationary, a spiral of inflation and USD devaluation could easily develop.”