Emerging-market jitters over Trump
● US President Donald Trump’s distaste for rising US interest rates and his stinging criticism of the Federal Reserve may spur an acceleration of the hiking cycle in that country, raising fresh concern for portfolio outflows from emerging markets.
Trump this week lashed China and the EU for their weak currencies, saying a stronger dollar and rising interest rates were undermining America’s “competitive edge,” and took a fresh jab at the Federal Reserve. He also said he was prepared to impose US tariffs on all Chinese imports.
“China, the European Union and others have been manipulating their currencies and interest rates lower, while the US is raising rates, while the dollar gets stronger and stronger with each passing day, taking away our big competitive edge,” Trump tweeted on Friday. “The United States should not be penalised because we are doing so well.”
In an apparent reference to Fed rate increases, Trump added: “Tightening now hurts all that we have done. Debt coming due & we are raising rates — Really?”
The criticism has sparked fresh concerns over the Fed’s independence, which former chair Janet Yellen steered with a firm hand.
Dennis Dykes, Nedbank chief economist, said Trump’s comment may spur current chairman Jerome Powell into action sooner. The US is expected to raise interest rates twice this year, resulting in portfolio outflows from emerging markets as investors seek higher yields.
“He might actually now raise [interest rates] quicker to show that he is not under political pressure,” Dykes said.
“If he raises rates a bit slower than [the Fed has] actually been reflecting in their dot plot, people will say the Fed has been put under pressure and they are responding to Trump. That will be a lose situation.
“I think they will just go ahead with what they were going to do. If they now start to deviate from what they’ve been signalling then it will be a big problem either way.” The Fed has raised interest rates five times since Trump took office in 2017, with two coming this year under Powell, Trump’s pick to replace Yellen.
Dykes said tightening was being done in a measured way. “They know what they are doing. If you’re controlling both fiscal and monetary policy it could lead to problems. It’s ill-advised and coming from a position of ignorance.”
He said any ill-advised criticism will “throw another uncertainty into the whole mix, along with trade wars. It’s not a great idea but I’m sure we’re going to get more tweets before year end because I’m sure they are going to raise rates another two times this year.”
We’re going to get more tweets as they raise rates