Trump challenges Fed's independence Trump challenges Fed's independence December 6 2018

Trump challenges Fed's independence

How will the Fed respond to Trump's criticism of the recent hikes?
Published August 1 2018
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One of the defining characteristics about the Federal Reserve is that it operates independently from the rest of the U.S. government. Most politicians don’t talk about it much, let alone tell it what to do publically. Of course, President Trump is not a typical politician, and it is not surprising he recently said he was “not thrilled” with the recent hikes because of their potential to stem economic growth. After all, he criticized former Chair Janet Yellen during his campaign (that time for keeping rates too low). Although Jerome Powell was named a Fed governor by the Obama administration, Trump nominated him to lead the central bank, and the president might think he has sway. Or maybe Trump is just saying this to the press because he knows he has no real pull.

The rest of the year will say a lot about the issue. The minutes from the Fed’s June meeting showed that policymakers are comfortable with the pace of U.S. GDP growth, which lends more credence to the dot plot’s indications for two more increases this year. But will Powell try to hold rates steady to please Trump or advocate raising them? If the latter, it could be a defiant message to Trump about the separation of the offices. We will probably never know if that's the case.

One thing to keep in mind is that the manipulation of interest rates is not the only tool the Fed is currently using to affect monetary policy. Its ongoing plan of letting Treasury and government agency securities roll off its $4 trillion-plus balance sheet—known as quantitative tapering ()—has the potential to raise rates itself. The plan puts more supply in the marketplace, so a better price must be offered, leading to higher rates. This wasn’t a major factor when QT began with $30 billion removed in the fourth quarter of 2017. But in this quarter, $120 billion will roll off and in the fourth quarter the number rises to $150 billion. It is becoming a significant amount.

Many thought the Fed would have said by now what it intends to do with QT in 2019. The three most plausible scenarios are that it continues to raise the monthly amount by $30 billion a quarter, it lays out a different pace of increases or it stops QT cold turkey to see what happens.

With the two hikes already made this year, many cash and liquidity rates across the industry have risen, with expectations rates may continue to increase in the second half of the year.

Many cash managers have been putting new dollars into money market funds, with the expectation that re-allocation will ramp up because money funds diversify liquidity management while offering competitive return. Assets in prime funds continue to grow.

We kept the weighted average maturity () of our prime funds in a 30-40 day range; the range for our government and municipal funds remained at 25-35 days. The London interbank offered rate () barely moved in July, with 1-month at 2.08%; 3-month at 2.34%; and 6-month bumping up just 2 basis points to 2.52%. The Treasury curve was 1.88%, 1.97% and 2.14% for the same periods.

Tags Liquidity . Fiduciary . Interest Rates . United States . Cash Management .

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Gross Domestic Product (GDP) is a broad measure of the economy that measures the retail value of goods and services produced in a country.

London interbank offered rate (Libor): The rate at which banks can borrow funds from other banks in the London interbank market. The Libor is fixed on a daily basis by the British Bankers' Association and acts as a benchmark for other short-term interest rates.

Federated Investment Management Company is the advisor to the fund.

Federated Securities Corp.