Question

give your thoughts and impression on this topic ( no less than 300 words ) thank you.

“Trump says economy would take off like 'a rocket ship' if Fed cut rates, ending tightening policy

"I think they should drop rates and get rid of quantitative tightening. You would see a rocket ship," President Trump says of the Federal Reserve.

Trump says the Fed "really slowed us down.".”

Answer 1

The Federal Reserve, the central banking system of the United States of America among other things conducts monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates in the economy. With the view by Trump to decrease interest rates thereby taking a dovish stance on monetary policy, the intention is to increase the money supply in America as businesses will borrow more due to lower rates. The downside in the long run could be an increase in inflation because with more money supply in the nation, the general price level will see a rise.

Criticizing the Fed with respect to accusations of a slowdown is greatly unfair as the hawkish stance taken was due to improvement seen in the employment situation of the country. Increased interest rates can have positive effects such as encouragements in capital inflows thereby having a further positive impact on investments which in turn is necessary for development. Cutting off rates could lead to capital outflows from the United States as investors could prefer other countries where the returns on investment are high. This could hamper growth and development. When interest rates are lowered, the supply of the dollar is high and this will decrease the demand for dollars by foreign countries. This will lead to depreciation in the value of the dollar making imports expensive.

Even if the objective of Trump is to take care of employment by lowering rates to increase production, this will be helpful only in the short-run. In the long-run, inflation caused can have devastating impacts on the economic scenario. It could lead to less disposable income in the hands of the population which can propagate in a negative way and affect production in the long-run by causing a recession. With the trade tensions with countries especially China, the administration must be prudent and not take hasty decisions such as rate cut. Balance should be maintained in terms of overall growth of the United States where macroeconomic indicators are stable.