Furor over the Fed : Presidential Tweets and Central Bank Independence

Trump using Twitter to criticise Federal Reserve was quite something to witness in 2019. I blogged on the topic earlier where a NBER paper showed that Trump attack transmitted to lower interest rates.

Antoine Camous and Dmitry Matveev of Bank of Canada in this paper have similar findings as the NBER paper:

We illustrate how market data can be informative about the interactions between monetary and fiscal policy. Federal funds futures are private contracts that reflect investor’s expectations about monetary policy decisions. By relating price movements of these contracts with President Trump’s tweets on monetary policy, we explore how markets have perceived presidential attempts to influence monetary policy decisions. Overall, our results indicate markets expected the Federal Reserve to adjust monetary policy in the direction suggested by President Trump.

Financial markets reacted to President Trump’s tweets by assigning a higher probability of a policy rate cut in the future. We find that market adjustments on the FOMC decision days correct for expectations of larger interest rate cuts, suggesting that the Fed did not surrender to political pressure, at least not as much as financial market participants anticipated.

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