Even as he touted the state of the U.S. economy in his address at the World Economic Forum in Davos, Switzerland, U.S. President Donald Trump again lashed out at the Federal Reserve, criticizing the institution for its monetary policies, while also calling for negative interest rates.
- Trump took his biggest swipe yet at the Federal Reserve, saying that his economic achievements, which have helped the U.S. remain “by far the strongest economic power in the world,” came despite the central bank’s policies holding back the U.S. economy.
- Trump also spoke about the U.S. being forced to compete with nations that are getting negative rates: “They get paid to borrow money, something I could get used to very quickly,” he said. “Love that.”
- Several big central banks around the world have adopted negative interest rates over the past year in order to combat low inflation, most notably the European Central Bank and the Bank of Japan.
- That means sovereign yields in Japan and Germany are now trading below zero, compared to U.S. Treasury yields and Federal Reserve overnight lending rates that remain high—putting the U.S. at a disadvantage to the rest of the world, according to Trump (economists are split over whether negative interest rates do in fact stimulate economic growth) .
- Touting his bilateral trade deals and financial deregulation, Trump said that “we still have the best [economic] numbers that we’ve had in so many different areas,” even despite the fact that the Fed has “raised rates too fast and lowered them too slowly.”
Crucial statistic: The Federal Reserve hiked interest rates four times in 2018, before then cutting rates three times in 2019.
What to watch for: Federal Reserve officials left interest rates unchanged in their final meeting of 2019, following three straight rate cuts earlier that year. The Fed has now adopted a “wait-and-see” approach, signaling that its policy will remain on hold through 2020, with no interest rate cuts or hikes planned for this year. That means the Fed will look to stay on the sidelines in an election year, with Federal Reserve Chair Jerome Powell indicating that “the current stance of monetary policy likely will remain appropriate.” The Federal Reserve’s first two-day policy meeting this year will take place from January 28 to January 29, 2020. Markets largely agree with the Fed’s broadly neutral outlook, at least for now: Federal-funds futures for the next few meetings show an 87% chance that interest rates hold steady at the current 1.5% to 1.75% range. In the second half of 2020, however, futures show that the Fed may need to cut rates again to support the economy’s record-long expansion.
Key background: This isn’t the first time Trump has praised negative interest rates while criticizing the Federal Reserve’s monetary policy. As early as last week, at the Phase One China trade deal signing, he said the idea of negative rates was “incredible,” and that it bothers him that Germany and other countries “are getting paid to borrow money.” While Trump’s attacks on the Fed and its chairman, Jerome Powell, have become common in recent years, his critical comments reportedly startled some in the audience at Davos. The president has repeatedly criticized the Fed’s monetary policy, arguing last year, for instance, that to help boost the U.S. economy, rates should be reduced to “ZERO, or less.” A negative interest rate scenario—which is already playing out in Europe and Japan—would effectively give borrowers the advantage over lenders and effectively put taxes on bank deposits.
This article was originally published on Forbes.
