Trump Raises Expectations for the Federal Reserve Once More
The president, Donald Trump, has left many people
wondering what he expects after stating that the US economy might experience
growth of up to 15% under a new Federal Reserve Chair, Kevin Warsh, who “does
his job right.” This remark, made in Trump’s typical brash manner, immediately
caught the attention of financiers, economists, and netizens.
To put this in perspective, a healthy American economy
experiences growth of about 2% to 3%. But fifteen per cent is unheard of; it is
only seen in third-world countries when they are just starting off after war or
in some unreal figures on a computer screen.
Lower Interest Rates Will Lead to Economic Growth
The message was clear from Trump; he will begin by
reducing interest rates. The president implied that Warsh should do nothing
more than decrease interest rates so that there can be increased borrowing, which will lead to high levels of business confidence and hence make America
grow like never before.
According to Trump, high interest rates kill economic
activity. If you reduce them, everything changes: factories are being opened
all over the place, consumers start spending money like there’s no tomorrow,
and GDP goes through the roof. It may be criticized for being too simple, but
his followers argue that it shows his consistent view that the Federal Reserve
ought to foster economic growth rather than impede it.
Wall Street Reacts… Carefully
There was a cautious response mixed with curiosity
from the markets. Although traders did not rush to factor in a GDP growth rate
of 15%, there was increased activity in sectors that are sensitive to changes
in interest rates. While it may seem like a stretch, an extremely pro-growth
central bank usually bodes well for stocks on paper at least.
Economists, on their part, started calculating while
others also took out their stress balls. Many noted that achieving such growth
would need incredible productivity increases, explosive population expansion or
an economic miracle unprecedented in American history.
Nevertheless, some analysts believe that Trump’s
statement is not so much about being accurate as it is about showing where he
is headed.
The Sarcasm Beneath the Strategy
It was not just an economic prediction but also a
veiled threat in Trump’s statement. By relating Warsh’s potential
accomplishments with remarkable economic expansion figures publicly, the head
of state sets very high standards and indicates clearly what type of Federal
Reserve he prefers: proactive, accommodative and anti-inflationary.
Critics argue that setting growth targets for
political purposes may undermine the credibility of the Fed. On the other hand,
supporters maintain that voters are more concerned about employment and
salaries than theoretical independence.
Reality vs. Rhetoric
Is a 15% growth rate achievable in the US? Most likely
not. Nevertheless, could policies targeted at lower interest rates and looser
financial conditions enhance short-term expansion? Maybe.
One thing is sure: Trump does not set low expectations
but rather inflates them. This means that Kevin Warsh will have to take up the
position of the Fed chair under enormous pressure due to promises of historical
growth made by him.
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