Richard Jerram, Chief Economist, Bank of Singapore, Member of OCBC Wealth Panel

“Not thrilled” about higher interest rates

The USD has come off recent highs, apparently in response to President Trump complaining about Fed
rate hikes and accusing other countries of manipulating their currencies. This raises the question of
whether there is much that he can do to affect Fed policy or to drive the exchange rate lower. We are
dubious.

Markets had a taste of this in late January when Treasury Secretary Mnuchin was seen to be trying to
talk the currency lower, noting the weaker dollar was good for trade. USD showed brief concern, but it
has strengthened about 7% since then, with no policies to back up Mnuchin’s comments.

Similarly, Trump might prefer low interest rates, but he has no practical means of affecting policy
decisions, either directly or via appointments to the Fed board. An obviously political nomination
would have little chance of securing Congressional approval – even credible candidates often struggle.

Looking for somebody to blame

In fact, Trump’s nominations have been uncontroversial and show no attempt to politicise the Fed. The
root of his criticism might simply be an insurance policy – he is looking for somebody to blame if
growth fades before the next presidential election.

Poised to hike interest rates in September

Another Fed rate hike at the late-September FOMC looks like a done deal and the minutes from the
latest meeting give no hint of a break from the recent path of a hike each quarter. The analytical and
decision-making structures of the Fed should be resistant to political influence.

The policy outlook for next year contains the usual uncertainties. Note that the Fed is shifting to
holding a press conference after every meeting, which is seen as making each one 􀍞live􀍟 and so easier
to shift from the once-per-quarter pace. Rising inflation could lead to pressure for a faster pace of
tightening, or growth disappointments could lead to a pause, but for the moment the Fed seems
comfortable with the current path.

Approaching peak policy divergence

In terms of currency manipulation, developed economies are not intervening directly and can hide
behind the defence that any exchange rate weakness is just a consequence of monetary policy. Even
China can argue that CNH weakness would be more pronounced if it were not intervening to tighten
controls on capital outflows, so any manipulation is producing a stronger, not weaker, currency.

Import tariffs should theoretically send an exchange rate higher, so perhaps Trump himself is the main
currency manipulator. Of course the US could intervene directly in currency markets by using its
Exchange Stabilisation Fund to sell USD, but history shows that such unilateral action tends to be
ineffective.

Talk is cheap, but its impact is limited. We suspect that we are approaching peak policy divergence,
which will be one of the limitations to stronger USD.

Politics unlikely to have much material impact

Trump’s legal and political troubles might make for entertaining television, but they seem unlikely to
have a significant impact on policy. Tax reform is done and the president has the authority to drive
trade policy, while there are no other big items on the economic agenda.

At some point Congress will need to act (and cooperate with Trump) if it wants to prevent a material
fiscal tightening in 2020 as the recent boost fades, but it seems too early to try to assess the related
political dynamics.

In conclusion, we think that the Fed and the USD will respond to economic fundamentals and not to
political jawboning. This points to more Fed rate hikes, but also eventually a softer USD as it is weighed
down by the twin deficits and as more developed economies join the policy tightening cycle.