A 3.5% sell off in the Turkish Lira today should serve as a warning to President Trump that jawboning the Fed has consequence. The Wall Street Journal reported this morning that the Turkish central bank left its key one-week repo rate unchanged at 17.75%, 100 basis points less than the median estimate in a recent Bloomberg survey. With inflation at 15.4% and the lira having lost a quarter of its value since the first of the year, market expectations were that the central bank had no choice but to raise the one-week rate. Recep Tayyip Erdogan, who won reelection last month on a populist, anti-immigrant platform, recently appointed his son in law, Berat Albayrak, as finance minister. Mr. Albayrak has written that cheaper credit leads to slower inflation, a view not held by the economic mainstream, and one that if implemented, would likely result in accelerating inflation.
Why should we care? While Fed watchers have been largely dismissive of Trump’s recent remarks expressing displeasure with the direction of monetary policy - parroting comments made to him by a more informed, but no less ideological Rand Paul - we have seen the outsized effect of his tweets and one-offs in exciting his base while antagonizing Democrats and everyone else. Fortunately, the president’s rumblings regarding Fed policy don’t elicit the same emotionally charged response from voters as say, immigration or the Russia investigation, but if ongoing and thematic, could have the potential to undermine the legitimacy and independence of the Fed and its mission.
Monetary policy is wonkish by nature. Expert knowledge and the consistent implementation of policy matters. Because the hangover, in the form of higher price and wage pressure, often doesn’t occur until a future election cycle, the short-term economic high that comes from easy money is a political siren song. Which is why – by design – President Trump’s expressed opinion on monetary policy, informed or otherwise, is wholly irrelevant and completely counterproductive.