Donald Trump has been tweeting about the Fed for years. Now a new paper suggests that, since he became president, his tweets are actually having an effect — and are undermining the Federal Reserve’s independence.

A closer look, however, indicates something more subtle and benign: Trump’s tweets are simply a window into the changing political debate about the effectiveness of monetary policy, and that debate has an impact on future policy.

The researchers, from Duke University and the London Business School, focused only on Trump’s tweets since June 2015. They ignored tweets that also contain information about the economy more broadly. They reasoned that there are at least two ways the president could influence the Fed’s choices. First, he could pressure the Fed directly, urging it to alter its response to the macroeconomic environment — by, say, cutting interest rates. Second, he could alter the macroeconomic environment itself — by, say, launching a trade war.

The researchers wanted to isolate the first effect. So they focused only on tweets that were critiques of the Fed, and to measure the response they looked not at the Fed’s actual moves but used high-frequency market data. (Investors and large banks trade futures contracts that are essentially bets on the whether the Fed will raise or lower interest rates.)

What did they find? Within five minutes of a critical tweet by the president, according to the paper, the Fed futures market lowered its expectation of future rates. Each tweet had only a miniscule effect, but the researchers estimate that the cumulative effect has been about one-tenth of a percentage point over the last year. And that effect is growing over time.

Since July, they estimate that the influence of the president’s tweets has tripled — and if he keeps it up for another year, it could push estimates of the future Fed funds rate down by nearly a third of a percentage point. A standard cut is typically a quarter of a point. That implies the president may be jawboning his way to one additional interest rate cut by November 2020.

That seems troubling. But there are two complications to consider, both of which center around a common theme with Trump: whether he is a symptom or a cause.

First, even some of Trump’s critics admit that while his tone and method are mistaken, his basic message is correct: The Fed needs to lower interest rates. Thus it’s difficult to tell whether the Fed is responding to Trump’s tweets themselves, or to a wider discontent that Trump’s tweets represent. Second, the Fed has long indicated that political pressure — in particular, from Republicans against lower rates — has constrained its plans to stimulate the economy. Trump’s tweets may simply represent a relaxation of that pressure.

Indeed, this is consistent with the researchers’ findings. They show that Trump’s tweets have little to no effect on expected interest rate changes at the next four Fed meetings. But the tweets have significant and persistent effects on interest rate changes expected nine or more Fed meetings into the future.

That is, the real impact of the tweets is on what investors think the Fed will do a year or more from now. Moreover, since the researchers find that the effect is cumulative, it appears as if Trump is changing the way the Fed reacts to the economy. This is evident in the way Chairman Jerome Powell speaks, often emphasizing the need to spread the economic expansion to a greater share of the population. 

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