Early on Tuesday the European Central Bank suggested that it could move soon to ease its monetary policy, and President Donald Trump is challenging the Federal Reserve to do the same.
In a series of tweets Tuesday morning, Trump appeared to criticize the ECB for “unfairly” devaluing the Euro against the U.S. dollar. A weaker Euro makes it more expensive for Europeans to buy U.S. exports, hurting the administration’s efforts to reduce the trade deficit.
On Tuesday morning, ECB President Mario Draghi pledged “additional stimulus” if the central bank continued to see downside risks to the Euro area.
Trump twice pointed out that European stock markets jumped on the news, reiterating another two times that he saw the ECB’s move as “unfair.”
The president’s tweets come as Fed officials convene in Washington for its June Federal Open Market Committee meeting, when policymakers are expected to hold rates steady but leave the door open to rate cuts later this year.
In line with previous calls to lower rates, Trump’s tweets suggest the Fed should counter the ECB’s move with our own round of rate cuts. In doing so, Trump hopes that lower rates would take some steam out of a rising dollar and provide a boost to the equities markets, a metric that Trump loves to benchmark his presidency against.
Weaker dollar
Draghi’s remarks expressed the view that economic conditions may not improve in the Euro area, saying that economic indicators point to “lingering softness” in future quarters.
“In the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required,” Draghi said.
The U.S. Dollar strengthened against the Euro on the news.
In general, higher interest rates relative to a foreign country’s interest rates makes the domestic currency stronger. Because the U.S. offers a higher interest rate on investments, those in Europe have found it more attractive to invest in U.S. assets. The foreign demand for U.S. dollars thus drives the value of the dollar up, relative to the Euro.
A stronger dollar makes it easier for U.S. buyers to purchase goods that are invoiced in devalued foreign currencies. But it also makes it more expensive for foreign buyers to buy U.S. dollar-denominated goods, which could hurt U.S. exports.
Trump’s suggested solution? Counteract with rate cuts of our own.
The president has used the same rhetoric in his trade war with China. He argued in May that Fed Chairman Jerome Powell should “match” China’s accommodative monetary policy to absorb the shock of tariffs and “win” the trade conflict.
But Marc Chandler, chief market strategist at Bannockburn Global Forex, told Yahoo Finance that Trump is missing the fact that exports are affected by far more factors than interest rates. Chandler said the tariffs risk a global slowdown in trade, which would present more negative risk than a “marginal move” in the strength of the U.S. dollar.
“It’s President Trump and other people who don’t fully understand how the currency markets work,” Chandler said of the rhetoric around foreign exchange.
Stocks going up
But Chandler acknowledged that a weaker dollar and lower interest rates are popular with the U.S. electorate, adding that it fits with the president’s goals of boosting exports and producing gains in the stock market.
By pointing to the index gains in European markets, Trump is hinting to the Fed that they too can juice equities if they cut rates.
On the heels of the Draghi speech, the German DAX Performance Index closed 2.03% higher to 12,331.75 and the French CAC 40 ended the day up 2.20% to 5,509.73.
In an interview with ABC News last week, Trump speculated that the stock market would be 10,000 points higher “if [Powell] didn’t do tightening, if he did nothing or perhaps even loosened.” Tightening refers to the Fed’s process of undoing the asset purchases it made in the aftermath of the financial crisis.
Trump has been unhappy with the Fed’s decision to raise rates four times in 2018, arguing that GDP growth would be higher if the Fed reduced rates by as much as 100 basis points or resumed quantitative easing. Bloomberg reported Tuesday that Trump was so displeased with Powell that the White House explored the legality of “demoting” him to a governor position back in February. White House economic adviser Larry Kudlow told Bloomberg that such a demotion is not currently under consideration.
For the Fed’s part, policymakers have cautiously indicated that they are prepared to support the economy if trade matters or underlying economic data point to a slowdown. Still, the Fed is not expected to change the target federal funds rate from its current range of between 2.25% and 2.5%. As of Tuesday afternoon, Fed funds futures contracts were pricing in a 22.5% chance of a rate cut at the conclusion of tomorrow’s meeting.
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Brian Cheung is a reporter covering the banking industry and the intersection of finance and policy for Yahoo Finance. You can follow him on Twitter @bcheungz.
