Trump lessons for Modi – US President’s advisors warn against firing the Fed chief

By: |
Published: December 25, 2018 3:23:48 AM

In India, given how both bond and stock markets rallied after Patel’s resignation, it is tempting to believe there will be no wrath of markets if the government continues with its policy to reduce the central bank’s autonomy.

narendra modi, vladimir putin, G20 meeting, G20 summit, theresa may, Shinzo AbeIn India, given how both bond and stock markets rallied after Patel’s resignation, it is tempting to believe there will be no wrath of markets if the government continues with its policy to reduce the central bank’s autonomy.

The government of India may have ignored the warning in RBI deputy governor Viral Acharya’s wrath-of-the-markets speech, but it appears the US government agrees with him on the impact removing a central bank chief can have on investor sentiments. Quite like in India, though a lot more directly, US president Donald Trump has never minced words on how the US Fed’s actions are hurting the economy. Indeed, there have been several media reports on how Trump wanted to fire Fed chief Jerome Powell.

While, in India, government pressure in the form of a consultation under Section 7 of the RBI Act and talk of making RBI responsible to its government-appointed board made Urjit Patel resign from the post of RBI Governor—a Section 7 consultation allows the government to issue a directive to RBI if it wants—US treasury secretary Steven Mnuchin has done well to ensure nothing of the sort happens in the US; or, at least, for now. In a series of tweets last week, he said he had spoken with president Trump who completely disagreed with the Fed’s policy of raising rates, but told him that “I never suggested firing Chairman Jay Powell, nor do I believe I have the right to do so.”

It is not surprising that Trump should be upset with the Fed raising rates since that is hurting the stock market but, as Mnuchin and others seem to be arguing, it was critical that the Fed start unwinding the decade-long policy of extraordinarily low interest rates and quantitative easing, if only so that the Fed had enough ammunition the next time it actually needed it; such low interest rates, as has been seen in the past, create their own bubbles that cause problems later. It is not as if the Fed hasn’t tried to unwind its position before, but the results have been quite worrying. In which case, the markets are concerned that, should there be uncertainty at the Fed—in the event of Powell getting fired—the path to normalcy will get more uncertain, and more worrying.

Read: Asia’s richest man Mukesh Ambani adds this much wealth while 128 rich people lose $137 billion in 2018

In India, given how both bond and stock markets rallied after Patel’s resignation, it is tempting to believe there will be no wrath of markets if the government continues with its policy to reduce the central bank’s autonomy. The fact that markets rallied is as much a testimony to how investors felt the government would pull back from the precipice as it is to the fact that market participants welcomed what a relaxed framework for banks as well as RBI reserves being sequestered would do to spending. In the long run, however, should RBI become answerable to a government-appointed board or its reserves sequestered and used to buttress government spending—this means monetary policy will no longer be as independent and also that RBI’s surpluses can be dipped into by any government—it is unlikely that markets will treat it as just another day at Mint Street.

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Retirement Plan: Why don’t the working poor save for old age?
2Atmanirbhar Bharat: Success depends on how India negotiates terms with US, EU
3Bad bank: Should India have one?