On Tuesday evening, Donald Trump escalated his criticism of Jerome Powell and the Fed (again).
At this point, it’s abundantly clear that Powell is in Trump’s crosshairs, something I suggested was inevitable way back in February. Since then, I’ve repeatedly warned that Trump would go the Erdogan route vis-à-vis monetary policy.
The analog is almost too perfect. Trump wants pro-cyclical monetary policy so he can deliver on his economic bombast and his penchant for over-the-top rhetoric and habit of mangling the English language means it’s virtually impossible to distinguish between his quotes about the Fed and Erdogan’s translated criticism of CBT.
Erdogan rails against the “interest lobby” – a nefarious cabal of conspirators he imagines are effectively derelict in their patriotic duty to the extent raising rates chokes off economic growth. Trump is now tacitly casting the Fed as unpatriotic to the extent rate hikes underpin the dollar, watering down the administration’s tariffs and thereby making it harder for America to “win” on trade (remember, Trump defines “winning” on trade solely in terms of deficits/surpluses).
On Tuesday, in an interview with the Wall Street Journal, Trump actually cast Powell as a villain of sorts, who revels in rate hikes. “[He] almost looks like he’s happy raising interest rates”, the President said of his Fed chair, adding that while it’s “too early” to say he regrets appointing ol’ Jay, he “maybe” thinks it wasn’t a good decision after all.
Erdogan would be proud.
Going forward, whether Powell will become the target of further presidential derision and, by extension, whether Trump will continue to encroach on central bank independence, largely depends on the evolution of the U.S. economy.
That is supremely ironic. As I will never tire of reminding you, it is Trump’s own policies that are forcing Jerome Powell to lean hawkish. Trump, unable to swallow his pride and reappoint Janet Yellen (an apparent proponent of pro-cyclical monetary policy), appointed a data-dependent Fed Chair at a time when fiscal stimulus was virtually guaranteed to turbocharge the very same data Powell would be inclined to lean on when making decisions about monetary policy.
On top of creating the conditions for a near-term overheat in the U.S. economy, Trump also set the stage for a stagflationary outcome later on down the road, by dialing up the protectionist knob. The imposition of sweeping tariffs threatens to undermine corporate profitability, undercut global growth and drive up domestic prices.
So now, the great irony is that Trump’s economy must cool off in order to give Jerome Powell plausible deniability when it comes to leaning dovish. If the data continues to come in hot, Powell’s credibility (at least so far as he’s endeavored to define “credibility” in terms of a propensity to rely on the data), depends on further, gradual hikes.
In the context of markets (which have recently soured at the prospect of the Fed tightening “too much”), this creates a range of possible outcomes. On Wednesday, Nomura’s Charlie McElligott presented those outcomes as follows:
So the thought-exercise then becomes this: what Fed / U.S. Economic scenario stops this psychological bleed in Equities? (and not accounting for “China trade war” variables):
- Steady U.S. data = Fed remains “on plan” = similar to the current “choppy” ongoing Equities turmoil (sector- and factor- rotations wreaking havoc against “bleeding” index level moves) as the market continues to believe that the Fed is “tightening into a slowdown”
- Acceleration of U.S. data (particularly Core Inflation or Wages / AHE) = Fed may have to accelerate their already hawkish tone = more interest rate volatility leading to even-tighter financial conditions (higher money rates, higher USD, higher cross-asset volatility); could even see a “stagflationary” investment backdrop
- Modest weakening in data = allows the Fed “air-cover” to back-down from their clearly articulated “data-dependency” and COULD slow normalization (hikes and / or balance sheet shrinkage pace), potentially provide relief with Equities sentiment as the “liquidity run-off” eases and Fed “policy error” concerns erode; HOWEVER, I think this too will see confidence fading as a “slowing” confirms “late-cycle” = not a disaster on index-level, but sector- and factor- selection / RV trades work best
- Large weakening / slowdown in data = Fed pivots “dovish,” which in my-mind would see a potential INITIAL risk-asset relief, but then soon be recognized for what it is: that the Fed will have indeed hiked the economy into restrictive territory—perhaps even into recession, which would see global risk-assets crushed
If you come away from that thinking there are no “good” eventualities, that’s because there really aren’t. At least not with respect to equities. Option #3 is the best, but as McElligott writes, far from dispelling late-cycle concerns, it will actually serve to confirm them.
The bottom line is that at some point, the longest rally in history will die, and what I continually try to emphasize whenever folks start rolling out the “bull markets don’t die of old age” cliché, is that people don’t die of old age either. Bull markets, like people, die from the symptoms associated with old age, and trying to draw a distinction between those two things is nothing more than semantics. The cycle has to turn at some point (that’s what cycles do), and we seem to be reaching the bend in the road – if you will.
Trump wants to extend the cycle and to be sure, he has succeeded in 2018 thanks to fiscal stimulus. But that stimulus puts a data-dependent Fed Chair in an impossible position.
If what the President wants is looser monetary policy, then paradoxically, he needs to root for less robust U.S. economic data.
Barring that, we’re a December hike removed from Jerome Powell becoming “the enemy of the people”.