I like to stay uninvolved with Fed chair Jerome Powell.
That’s from Donald Trump who spoke to reporters this afternoon before departing the White House for Iowa, and although the talking points are familiar, I suppose it’s worth documenting what he said considering how quickly long-end bond yields have risen over the past month.
Trump has pigeonholed the Fed by piling fiscal stimulus atop a late-stage expansion and he shot himself in the foot by ousting a Fed chair who favors pro-cyclical monetary policy in favor of a data-dependent chair who is inclined to hike rates out of an apparent abundance of caution amid ebullient economic data.
Don’t let the irony here be lost on you. Steve Mnuchin needs to borrow more to fund Trump’s stimulus, but that same stimulus is forcing the Fed to hike. Those rate hikes serve to increase the cost of the debt that’s being issued to fund the stimulus. It’s an insanity loop; a nightmarish collision of fiscal and monetary policy at the tail end of one of the longest economic expansions in U.S. history.
Complicating this immeasurably is the fact that the Fed is pulling its support for the U.S. debt market (i.e., running down the balance sheet). That puts more of the onus on private, price sensitive investors to absorb new Treasury supply. But because the fiscal position is deteriorating, those investors are likely to demand more compensation to fund U.S. deficits. That means the cost of borrowing rises, exacerbating the dynamic.
Just how anomalous is the U.S. fiscal trajectory? Or, said another way, is it normal to expand the deficit in order to fund stimulus when unemployment is at a 48-year low? Well, no:
(Bloomberg)
Trump is borrowing to fund stimulus we don’t need. And that borrowing means paying interest. Just ask the Treasury department who last Thursday reported that the U.S. spent a record $523 billion on interest in fiscal year 2018, up 14% from 2017.
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Given all of that, you can understand why Trump doesn’t want the Fed to hike.
“I don’t like what the Fed is doing”, Trump said on Tuesday afternoon, during the same ad hoc presser mentioned here at the outset. “I think we don’t have to go as fast on interest rates”, he added.
I’m not sure anyone but Trump would characterize the Fed as “going fast” when it comes to hikes, although again, there is one person who might agree with him: Janet Yellen. Oh the sweet, sweet irony.
Anyway, Trump went on to say that America “doesn’t have an inflation problem”, an effort to head off questions about whether Powell’s hikes are justified considering the fact that late-cycle stimulus is inflationary and, by the way, so are tariffs.
I asked President Trump about interest rates a few minutes ago. He said he thinks they’re too high, particularly because there’s no inflation, but also said that he has not talked to Fed Chair Jay Powell about it because he doesn’t want to get involved. pic.twitter.com/bU8di5cjpE
— Eamon Javers (@EamonJavers) October 9, 2018
Back in July, in an interview with CNBC’s Joe Kernen, Trump lamented the fact that relatively hawkish Fed policy is indirectly helping America’s trade partners weather the tariff storm.
“I’m not thrilled because we go up and every time you go up they want to raise rates again”, the President said, adding that while he’s “not happy about it”, for the time being he’s going to “let them do what they feel is best.”
A day later, Trump took to Twitter to accuse China and Europe of currency manipulation on the way to explicitly blaming Jerome Powell for “hurting all that we’ve done.”
For Trump, Fed rate hikes are bad for two reasons. First, they drive the policy divergence between the U.S. and the rest of the world wider, thereby supporting the dollar. The stronger the dollar, the weaker the tariffs, all else equal. Second, Fed hikes work against Trump’s pro-cyclical fiscal policy, which is designed to overheat the U.S. economy.
Fast forward a month (give or take) from Trump’s July broadside against his Fed chair and the President lashed out at Powell again, first at a fundraiser held at the Southampton home of Howard Lorber, the chairman of hot dog company Nathan’s Famous, and then in an exclusive interview with Reuters.
“I expected Jerome Powell to be a cheap-money guy”, Trump reportedly said in the Hamptons.
Tuesday’s comments are just a continuation of this same criticism.
Oh well.
Investors should make up their minds, one day they fear that the global cycle will contract due to tariffs and China slowdown, next day they fear an economy too hot and yields up.
You can’t get 3 people to agree to the toppings on a pizza. So why should lots of investors have a single idea on the economy?
Floor the gas in a car traveling down a pitch black straight road knowing somewhere down the line there is a concrete wall. Are you going too fast or are you about to crash? Make up your minds.