Trump's tweets threaten Fed independence

10 Oct 2019

New research shows President Trump’s criticism of the US Federal Reserve’s monetary policy influences expectations about future interest rates

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The effect of US President Donald Trump's regular tweets, favouring a more expansionary monetary policy, lowers market participants’ expectations on future interest rates and threatens the independence of the central bank.

These are key findings of an academic study by Assistant Professor of Finance Howard Kung and PhD candidate Thilo Kind, both of London Business School, and Francesco Bianchi of Duke University.

It is widely held that central bank independence is an important means of containing inflation by curbing political pressure for expansionary monetary policies. The study therefore aimed to assess the effect of President Trump’s public criticism of the Federal Reserve’s policy decisions.

As both the President’s Twitter account and market movements in interest rates are timed to the second, the researchers used this high-frequency information to analyse the impact of his Twitter messages on the policy decisions made by the Federal Open Market Committee (FOMC).

Based on the period from June 2015 to August 2019, the research team found that the aggregate effect of Trump’s tweets reduced traders' expectations of future interest rates more than would otherwise have been the case.

Commenting on the results, Dr Kung explained:

“The average effect across all contracts is -0.30 basis points (bps) per tweet and the cumulative effect is -10 bps, which is sizable considering that the typical change in the target rate at each FOMC meeting is 25 bps.

“In addition, the expected ‘federal funds rates’ at longer horizons are more negatively affected by the tweets than the shorter horizon ones.”

This reflects market perception that the President persistently influences US monetary policy.

“Further, even if the Trump tweets only have a direct impact on market expectations, they can still indirectly affect policy due to how the Fed factors in market expectations when deciding on monetary policy.

“Overall, the collected tweets ardently pressure the Fed to lower interest rates. Our findings suggest that market participants believe that the erosion to central bank independence is significant and persistent."

The full paper is available online from the Bureau of Economic Research.

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