Markets are making the same mistake with Donald Trump’s complaints about the Fed (delivered at a fundraiser the Hamptons over the weekend and reiterated in a Reuters interview published on Monday afternoon) that they did with Trump’s rhetoric on trade and with Turkish President Recep Tayyip Erdogan’s insistence that he would take a more active role in monetary policy after the June 24 election.
While most of the commentary I’ve read on Tuesday finds folks drawing a distinction between Erdogan and Trump in terms of what can and can’t be done with regard to commandeering the central bank, what I would say is that if you go back to June 7 when CBT hiked the one-week repo rate days after simplifying monetary policy in a bid to stem the rout in the lira, most analysts were cheering on the way to suggesting that CBT was independent after all. Consensus headed into the July 24 CBT meeting was still betting on another policy rate hike even after Erdogan installed Berat Albayrak as economic czar leaving no room for Mehmet Simsek.
I’m going to use an excerpt from the latest morning missive penned by SocGen’s Kit Juckes and please note, this is not to say that Kit necessarily falls into the category of people who underestimated Erdogan. I’m just using this as an example of what the tone generally is on Tuesday when it comes to talking about Trump’s Fed comments in the context of Erdogan. Here’s Kit:
The President would like easier monetary policy, or at least, he would not like to see interest rates marching higher to offset the boost to the economy from his fiscal and trade policies. His liking for low rates is something he has in common with Turkey’s President Erdogan, possibly because at heart, both are in the real estate business. The difference, of course, is that President Erdogan can influence monetary policy, because the CBRT is clearly not independent; whereas President Trump can feel let down by Fed under Chair Powell, but he can’t do much about it.
That’s what everyone is saying on Tuesday, but as alluded to above, not a whole lot of people were willing to admit that CBT was “clearly not independent” three months ago. Sure, everyone knew Erdogan exerted the kind of undue influence over monetary policy that we’d all come to expect from him, in particular, and that you’d expect from an autocrat more generally, but I was baffled at the extent to which the market was willing to give CBT the benefit of the doubt in May and early June despite explicit rhetoric from Erdogan that the central bank effectively belonged to him.
There was a similar setup with Trump’s trade rhetoric. Over and over again the President insisted that he was serious about slapping sweeping tariffs on America’s trade partners and time and time again analysts and market participants assumed he was either bluffing or playing for political points ahead of the midterms. Well, he wasn’t bluffing. Probably the most poignant example of an analyst lamenting his early penchant for optimism is the following passage from BofAML’s David Woo who, in a note out early last month assessing the outlook for NAFTA, described his incredulity:
This strategist had held out hope until the end. We had assumed that pragmatism would prevail. We were wrong about the outcome and it is even possible that we were wrong about all our assumptions. The Trump administration might have decided that the relative strength of the US economy compared with the rest of the world may give it more leverage in a war of attrition. This means that we may need a meaningful market correction to force a compromise.
What I would gently encourage market participants to consider in light of the lira collapse and the trade escalations is that taking a “me or your lyin’ eyes approach” to evaluating the rhetoric of unhinged world leaders is a fool’s errand. They (in this case Trump and Erdogan) are telling you what they’re going to do and you aren’t listening.
Stay with me here, because this isn’t a political rant, this is just reality.
Donald Trump has, unfortunately, eroded America’s institutions. On a daily basis he seeks to encroach on press freedom and judicial independence and he openly calls for the Department of Justice and the FBI to investigate his political rivals and their family members.
The idea that he won’t go after the Fed seems tenuous at best. In the Reuters interview published Monday, Trump said he would continue to criticize Powell if the Fed keeps hiking rates. Of course, Trump’s own policies are in no small part responsible for Powell’s persistent hawkishness. Those interested in the lengthy explanation of that are strongly encouraged to check out “Presenting, The Dollar Intervention Delusion” and “Dollar Delirium: A Quick Trip Through The Insanity Loop“.
This is right out of the banana republic playbook and it’s unfolding alongside the collapse in the lira. In other words, even if you’ve got no sense of history, there’s a template for you to follow in real-time courtesy of Turkey. Donald Trump is running deficit-funded fiscal stimulus at a time when the economy is already overheating and he’s demanding lower interest rates in increasingly abrasive terms while simultaneously cracking down on dissent by, among other things, stripping former intelligence officials of their security clearances, stripping career civil servants of their pensions for criticizing him, threatening antitrust action against companies in retaliation for bad press, and on, and on, and on. The writing is on the wall here.
The idea that Trump is going to sit idly by while Jerome Powell drives the policy divergence with America’s trade partners ever wider on the way to pushing the dollar higher and, by extension, fighting China and Europe’s trade battles for them, is silly.
Suddenly, former traders and FX analysts have become political scientists and historians on the way to making claims about what Trump “can”, “can’t” and “won’t” do, when it comes to the Fed. Well sorry guys and gals, that’s not your area of expertise. Trump will try to overstep here if he runs out of other options for “winning” his trade war. If he gets irritated enough, he’ll just remove Powell on the excuse the Fed chair is acting against America’s security interests.
You think I’m joking, but I’m not and if you don’t think that’s at least possible, then you haven’t been paying attention for the past 15 months and you didn’t listen to what Trump said yesterday when Reuters asked him about Fed independence.
Finally, yes, Trump can influence monetary policy. The idea that Jerome Powell hasn’t already considered what it’s going to be like to have to wake up every, single day and find himself the subject of a Twitter rant from the President is laughable. Of course he’s considered that. He’s human after all.
Is that going to compel him to storm into the next Fed meeting and say “listen everybody, I don’t want to be a human hashtag on Twitter, so we’re not hiking”? Well no, obviously not. But it’s a factor and to the extent emerging markets continue to argue for a pause, Trump’s pressure might well tip the scales. At that point, it will be impossible to disentangle what “caused” the “pause” (as it were).
What will Trump's Twitter nickname for Jerome Powell be after the September hike?
— Heisenberg Report (@heisenbergrpt) August 21, 2018
Is any of that to say that the most likely outcome is Trump moving aggressively against his Fed chair? Obviously not. There would be backchanneling (and there probably already is) and it’s possible Trump will deescalate the trade war in the meantime, thus obviating the need for Powell to help put the brakes on the dollar rally.
But please – please – stop pretending like what’s going on isn’t what’s going on. That kind of deliberate obliviousness led everyone to underestimate Trump on trade escalations and it made everyone (or almost everyone) unable to see just how imminent the lira’s collapse really was.
As Trump himself would say, “you see what’s happening”.