U.S. Federal Reserve’s optimism should be treated with caution

Year: 2020

This post is written as a brief comment to an article published on Channel News Asia titled: Fed touts economic recovery, vows to keep interest rates low (17 September 2020).

“That the Chairman of the Federal Reserve, Mr Jerome Powell, has been politically compromised by President Trump is an open secret.

His willingness to accommodate the interest of and buttress the preferred narrative of the President against economic evidence is a well-established pattern. This is especially determinative in an election year and marks the nadir for the independence of the Federal Reserve.

The US economy in no sense, except with respect to equity markets, which the Fed provided cheap liquidity in fueling, shows evidence of being in recovery. The US COVID situation continues to deteriorate. Its Federal and State debts are all historic levels. Employment continues to decline. Stimulus measures will wear off soon. SMEs are being laid to waste even as technology and financial sectors thrive.

The first due to COVID and the second, due to cheap liquidity. The policy direction and premise set by Mr Powell is clearly intended to please President Trump, and as a by-product, Wall Street, which has picked up speed like a car with no brakes. Such a scenario has a predictable conclusion.

Other Central Banks governors should be cautious in taking the lead from Mr Powell. Zero bound or negative interest rates have long-tail risks and the prospect for perverse outcomes.”

– Devadas Krishnadas