Former New York Fed President Bill Dudley calls on the central bank not to help President Donald Trump carry on his trade war with China.
In a sharply worded comment to his former colleagues, Dudley urged Fed officials not to do so lowering interest rates only as a countermeasure, while the President continues his escalated collective bargaining battle with the Chinese in recent days.
"The central bank officials face a choice: they can enable the Trump government to embark on a catastrophic path to escalating the trade war, or send a clear message that if the government does so, it will be the president rather than the Fed which will carry risks ̵
Dudley went so far as to suggest that the Fed influence the next election against Trump.
"After all, the re-election of Trump poses a threat to the US economy and world economy, to the independence of the Fed and to its ability to meet its employment and inflation targets," he wrote. "If the goal of monetary policy is to achieve the best economic performance in the long run, Fed officials should consider how their decisions will affect the policy outcome in 2020." Chairman Jerome Powell with China's President Xi Jinping and in a tweet asked, "Who is our biggest enemy?"
The president calls for significantly lower interest rates, which he considers necessary in order to promote economic expansion and combat trade.
Dudley said the Fed should "refuse to play along" and could "go further" than Powell's conclusion last week that monetary policy may not be effective in countering the economic damage caused by tariffs.
"Officials could explicitly state that the central bank will not rescue a government that continues to make poor decisions about trade policy, making it clear that Trump will accept the consequences of his actions," he wrote.
A signal that the Fed is not participating in the trade war and at the same time preserving "much-needed ammunition" for interest rate cuts that may be needed to combat the economic downturn, Dudley said. Markets expect the Fed to agree another 25 bps lower than in July, the first time in eleven years, and an almost 80% chance of another bounce before the year's end.
In his speech last week in Jackson Hole, Wyoming, Powell promised that the Fed would continue to do its part to support the economy, but made no concrete intentions.