World renowned FX and rates strategist Donald Trump is on the warpath.
Having spent the first three days of the week tying himself in rhetorical knots trying to “explain” what exactly it is he believes or doesn’t believe about Russian meddling in the 2016 presidential election, Trump got back to focusing on trade and domestic economic policy Thursday when, in a characteristically controversial interview with CNBC, the President suggested he’s not pleased with Jerome Powell.
There are three main issues at play for Trump when it comes to the Fed:
- Fed hikes have the potential to slow down the economy when Trump wants it to overheat
- Fed hikes imperil the stock market rally which Trump has spent the better part of two years taking credit for
- Fed hikes drive the monetary policy divergence between the U.S. and its trade partners wider, thus pushing up the dollar and softening the blow of the administration’s trade policies
That latter point seems to be the most immediate concern for Trump and he made special mention of the Chinese yuan “dropping like a rock” in his comments to Kernen.
Hours later, the PBoC weakened the yuan fixing by the most since June of 2016, a move that suggested Beijing is more than happy to let the market guide the currency lower until they perceive that capital flight is an issue.
Fast forward to Friday morning and CNBC aired the full interview with Trump and in it, he says he’s prepared to turn the tariff knob all the way up to a Spinal Tap-ish “11” and slap duties on everything China exports to the U.S.
But this being Trump, he wasn’t done. He followed up on Twitter by (again) accusing China and the European Union of manipulating their currencies and not only that, he’s now making monetary policy via tweet, all but calling for rate cuts.
China, the European Union and others have been manipulating their currencies and interest rates lower, while the U.S. is raising rates while the dollars gets stronger and stronger with each passing day – taking away our big competitive edge. As usual, not a level playing field…
— Donald J. Trump (@realDonaldTrump) July 20, 2018
….The United States should not be penalized because we are doing so well. Tightening now hurts all that we have done. The U.S. should be allowed to recapture what was lost due to illegal currency manipulation and BAD Trade Deals. Debt coming due & we are raising rates – Really?
— Donald J. Trump (@realDonaldTrump) July 20, 2018
Yes, Mr. President, “really.”
Ironically, the reason that’s necessary is because when you pile fiscal stimulus atop an economy operating at full employment, you risk overheating the economy and driving up inflation and on top of that, the tariffs also risk pushing up domestic prices.
As far as the debt is concerned, if Donald Trump is worried about that, he might consider whether it’s a good idea to pass deficit-funded tax cuts and then, just months later, throw caution further to the wind by backing more spending.
Perhaps Trump has been reading Jeff Gundlach interviews. As a reminder, the DoubleLine boss has variously lambasted the folly inherent in increasing the deficit and raising rates at the same time. Here’s what he said in an interview with Barron’s released last week:
The strangest thing is that Congress passed a $280 billion tax cut and spending increases so late in the cycle, and with interest rates rising. It’s like a death wish. The U.S. is taking on hundreds of billions of dollars of debt while raising rates, which means our debt-service payments are going to be under serious pressure to the upside.
And here’s what Gundlach calls the “suicide mission” chart:
As a reminder, everyone knows Trump’s fiscal policies are the problem here.
“Federal fiscal policy is entering uncharted territory [as] Congress has voted twice in the last two months to substantially expand the budget deficit despite an already elevated debt level and an economy that shows no need for additional fiscal stimulus,” Goldman wrote, in a note dated February.
“US and global growth are both near momentum peaks, making this stimulus poorly-timed from a macro perspective”, Credit Suisse wrote just days after the Goldman note mentioned above was published, on the way to suggesting that Jerome Powell’s Fed should “accelerate their tightening in response to a large positive demand shock”.
48 hours after that Credit Suisse note made the rounds, SocGen’s Albert Edwards said this:
Whatever the arguments are in favour of tax reform in the US (and there are many), this is probably the singularly most irresponsible macro-stimulus seen in US history; to say it is ill-timed and ill-judged would be a massive understatement.
You get the idea. Trump’s own fiscal policies are a big reason why raising rates is so dangerous right now. But those same fiscal policies make raising rates imperative for the Fed because piling this kind of stimulus atop a late-stage expansion could push inflation up, especially in light of the tariffs.
Finally, this is just further evidence that Donald Trump is all set to channel his inner Erdogan on the way to commandeering monetary policy and putting Jerome Powell in an exceptionally awkward position.
Now, Powell either has to keep hiking or risk pausing and being accused of bowing to political pressure from the White House.
Think on that.