You can count Duke’s Francesco Bianchi and the London Business School’s Howard Kung and Thilo Kind among the growing crowd of analysts, economists and researchers who worry that Donald Trump’s extremely pernicious habit of tweeting about US monetary policy is distorting markets and eroding Fed independence.
In a new NBER paper called “Threats to Central Bank Independence: High-Frequency Identification with Twitter”, the three economists (and these are real economists, by the way, not the Stephen Moore/Larry Kudlow variety) deliver “market-based evidence that President Trump influences expectations about monetary policy”.
Specifically, they employ a high-frequency event study which uses a small window around the time stamps on Trump’s tweets on the way to determining that “the average effect of these tweets on the expected fed funds rate is strongly statistically significant and negative, with a cumulative effect of around negative 10 bps”.
The three PhDs join a chorus of recent research from the sellside commenting on the same phenomenon.
Earlier this month, BofA’s Savita Subramanian and Jill Carey Hall wrote that “since 2016, days with more than 35 tweets by President Trump have seen negative [S&P 500] returns (-9bp), whereas days with less than 5 tweets have seen positive returns (+5bp)”. About a week later, JPMorgan unveiled the “Volfefe Index”, which ostensibly quantifies the impact of Trump’s tweets on rates.
(BofA, JPMorgan)
Bianchi, Kung and Kind’s study produces “strong evidence” to support the contention that “the consistent pressure applied by President Trump to pursue more expansionary monetary policy is manifested in the market expectations of a lower target rate”.
In other words, Trump is succeeding in his efforts to commandeer the central bank, Erdogan-style.
Of course, it could be that Trump’s influence on short-end rates markets comes about not so much by way of his Fed criticism, but rather because he often pairs that bombast with trade escalations designed to engineer uncertainty and thereby compel policymakers to adopt a more accommodative stance. Either way, it’s deliberate, and “poses a significant threat to central bank independence”, the new study suggests.
Just this month, Trump has called the Fed a gutless, failure of an institution staffed by a gang of “clueless” “boneheads” who lack “vision” and “sense”. (We passed the “you can’t make this stuff up anymore” threshold a long time ago.)
Little wonder then, that economists believe Trump is directly responsible for “a steady erosion in central bank independence over the course of his presidency”.
