Am I happy with my choice? I’ll let you know in seven years.
That’s what Donald Trump told Reuters about Jerome Powell in an exclusive interview published on Monday afternoon.
The issue of Fed independence took center stage last month when the President expressed his displeasure at the course of Fed policy in a bombshell interview with CNBC’s Joe Kernen. A day later, Trump took to Twitter to accuse China and Europe of currency manipulation on the way to explicitly blaming Powell for “hurting all that we’ve done.”
The reference there was of course to Fed hikes, which are helping to buoy the dollar at a time when the administration is attempting to pile pressure on America’s trade partners with a series of tariffs aimed at righting what Trump imagines are a series of historical wrongs. Fed hikes have served to increase the policy divergence between the U.S. and other nations and that widening policy divergence has driven the greenback to one-year highs.
Positioning in the dollar reflects expectations of more hikes amid continually upbeat U.S. economic data and rising price pressures. In the week through Tuesday, USD net longs jumped another $1.4 billion to a new fresh “since January 2017” high at $24.3 billion overall.
We’ve spent a ton of time in these pages documenting the extent to which U.S. fiscal policy has pigeonholed Powell’s Fed. Those interested in the lengthy treatment are strongly encouraged to check out “Presenting, The Dollar Intervention Delusion” and “Dollar Delirium: A Quick Trip Through The Insanity Loop“, but the bottom line is that the combination of late-cycle fiscal stimulus and tariffs point to higher inflation outcomes (at least in the short term) and thereby beget a more hawkish Fed. Of course a hawkish Fed is USD+, and the stronger the dollar, the less effective the tariffs. Trump’s “solution”, thus far, has been more protectionist cowbell. To the extent protectionism is inflationary in the early stages, he’s running up the down escalator. The next round of tariffs on China (targeting an additional $200 billion in Chinese imports) is likely to hit consumer goods, thereby raising the chances of an inflation overshoot and forcing the Fed to lean even more hawkish.
On Monday, Bloomberg reported that over the weekend, at a fundraiser in the Hamptons, Trump criticized Powell anew, telling potential donors that he expected his Fed chair to be an “cheap-money” guy. The irony inherent in the juxtaposition between that and what then-candidate Trump accused Janet Yellen of doing in 2016 shouldn’t be lost on anyone.
Hours after the Bloomberg piece was published, Reuters released their interview and in it, Trump said the following:
I’m not thrilled with his raising of interest rates, no. I’m not thrilled.
We’re negotiating very powerfully and strongly with other nations. We’re going to win. But during this period of time I should be given some help by the Fed. The other countries are accommodated.
I think China’s manipulating their currency, absolutely. And I think the euro is being manipulated also.
Late last week, reports suggested the Treasury department will ask the Chinese delegation scheduled to arrive in Washington for trade talks this week to strengthen the yuan, an absurd proposition for all the reasons outlined in “You Can’t Fix Stupid: U.S. Treasury Will ‘Pressure’ China To Strengthen The Yuan“.
Trump also told Reuters he would continue to criticize the Fed if Powell persisted in raising rates as he’s widely expected to do in September and possibly again by the end of the year.
Asked whether he believed in the Fed’s independence, Trump had this to offer:
I believe in the Fed doing what’s good for the country.
I think that speaks for itself, but just in case, Trump is angling to commandeer U.S. monetary policy and he is implicitly accusing the Fed of acting against the interests of the country.
It’s hard to imagine how Jerome Powell can possibly proceed apace given these comments. If he hikes again, Trump will attack him on Twitter – it’s just that simple.
It also seems likely that the President now realizes he can effectively give Powell some plausible deniability if he (Trump) continues to say and do things that contribute to turmoil in emerging markets.
On the “bright” side, if Trump does end up compelling the Fed to take a pause, it would be a welcome reprieve for the embattled EM complex.
The downside there is that the more Trump openly criticizes Powell, the more political cover the Fed chair will need when it comes to pausing rate hikes without being accused of bowing to the White House. The more political cover he needs, the worse the crisis in emerging markets will need to be.
"DO YOU PROMISE TO BE A 'CHEAP-MONEY GUY' IF I MAKE YOU VICEROY OF INTEREST RATES?????!!!!!!!!!" pic.twitter.com/6uLlczBeQj
— Walter White (@heisenbergrpt) August 20, 2018