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MONETARY POLICIES


apparently out-of-control central bank.


Why the Frontal Attack?


Even if the president’s challenges are a needed check on the Fed, it has been questioned whether he is going about it in the right way. Challenging the central bank in public forces it to stick to its guns, because it must its


maintain credibility


with the markets by showing that its decisions are based on sound economic principles rather than on political influence. If the president


really


wants the Fed to back off on interest rates, it has been argued, he should do it with a nod and a nudge, not a frontal attack on the Fed’s sanity.


True, but perhaps the president’s goal is not to subtly affect Fed behavior so much as to make it patently obvious who is to blame when the next Great Recession hits. And


recession is


fairly certain to hit, because higher interest rates almost always trigger recessions. The Fed’s current policy of “quantitative tightening” – tightening or contracting the money


the Fed drops interest rates, banks flood the market with “easy money,” allowing speculators to snatch up homes and other assets. When the central bank then raises interest rates, it contracts the amount of money available to spend and to pay down debt. Borrowers go into default and foreclosed homes go on the market at firesale prices, again to be snatched up by the monied class.


But it is a game of Monopoly that cannot go on forever. According to Elga Bartsch, chief European economist at


supply – is the very definition of recession, a term Wikipedia defines as “a business cycle contraction which results in a general slowdown in economic activity.”


Tis “business cycle” is not something inevitable like the weather. It is triggered by the central bank. When


FX


Morgan Stanley, one more financial cataclysm could be all that it takes for central bank independence to end. “Having been overburdened for a long time, many central banks might just be one more economic downturn or financial crisis away from a full- on political backlash,” she wrote in a note to clients in 2017. “Such a political backlash could call into question one of the long-standing tenets of modern m o n e t a r y policy making – central bank independence.”


And that may be the president’s end-game. When higher


rates


trigger another recession, Trump can point an


accusing finger at the central bank, absolving his own policies of liability and underscoring the need for a major overhaul of the Fed.


End the Fed?


Trump has not overtly joined the End the Fed campaign, but he has had the ear of several advocates of that approach. One is John Allison, whom the president evidently considered for both Fed Chairman and Treasury Secretary. Allison has proposed ending the Fed altogether and returning to the


FX TRADER MAGAZINE January - March 2019 43


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