President Trump is known for his provacative and often inflammatory tweets, raging against everything from movie stars to the Federal Reserve. Is it possible these tweets actually have an impact on monetary policy? How are people perceiving the effects of these tweets on monetary policy? A new NBER paper by professor Francesco Bianchi and co-authors Howard Kung and Thilo Kind (both of London Business School), found 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, forecasting a steady erosion in central bank independence over the course of his presidency.” Bianchi and his team looked at President Trump’s tweets that specifically mentioned The Fed, starting in April of 2018. The study states that, “even if President Trump does not directly influence Fed decisions, his political pressure can still affect policy indirectly by changing market expectations regarding the Fed.”
The paper, titled “Threats to Central Bank Independence: High-Frequency Identification with Twitter” was released last month, and shows that tweets by the president can change the perception the public has about the independence of the Federal Reserve. Bianchi said that in the past the Federal Reserve has been subject to political pressure, but the president’s public criticism on social media gives researchers a chance to observe how markets react from the moment he hits the “tweet” button. “It is unprecedented to have the president of the United States criticizing so openly and forcefully the Federal Reserve Bank,” said Bianchi. “We show that, in average, a tweet by President Trumps that calls for lower interest rates is followed by a decline in market expectations about future rates. In other words, markets believe that there is a chance that the central bank will follow the president’s suggestion.”
What does this mean for the future of central bank independence? While Bianchi thinks that there is still a high level of confidence in the Federal Reserve, the continuous pressure coming from President Trump seems to be taking a toll. “Our findings suggest that market participants believe that the erosion to central bank independence is significant and persistent,” the paper concludes. Bianchi and his co-authors are planning on continuing to track the president’s tweets related to this issue, and hope to update the research as things continue to shift. At the rate the president tweets, time will only tell what further effects his tweets could have on monetary policy and the confidence in the Federal Reserve. Despite the time-consuming process, Bianchi is interested to see what happens. “In principle, the Federal Reserve over many years could prove that its actions are not affected by the political pressure. But in the immediate future it might have a hard time in changing markets’ perceptions.”
Economics Department
