Last year, Donald Trump’s infallible “gut” told him that his chosen Fed chair was making a policy mistake by not easing off the hawkish lean amid the administration’s efforts to turbocharge a late-cycle economy and notch early “victories” in a trade war that is now dragging into its second year.
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Trump’s Infallible ‘Gut’ Is ‘Not Even A Little Bit Happy’ With ‘Jay’ Powell, Ok?!
The ironies in Trump’s Fed criticism were manifold. For one thing, it was Trump’s own fiscal policies which compelled the Fed to adopt a hawkish stance. Piling fiscal stimulus atop a late-cycle dynamic at a time when the unemployment rate is sitting at a 48-year-low has the potential to overheat the economy, a prospect that effectively forces the central bank to hike rates.
Additionally, Trump had the Fed chair he needed in Janet Yellen, and his comments about her on the campaign trail clearly indicate that he was well apprised of her penchant for keeping policy loose in the interests of prolonging expansions and bolstering risk assets.
There are myriad other ironies embedded in Trump’s 2018 anti-Powell push, but for our purposes here, those short passages will suffice.
As documented for the umpteenth time on February 15 when Yellen told Marketplace’s Kai Ryssdal that she doubted whether Trump could even tell you what it is the Fed does, the president’s decision not to reappoint Yellen was a self-inflicted wound. It seems highly likely that her desire to keep the expansion going and perpetuate the equity rally would have overridden any reservations she might have had about Trump, which means you can be the closest thing to “sure” that had she been reappointed, the White House would have enjoyed at least some of the same cover that the Obama administration enjoyed in terms of relatively loose monetary policy.
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Trump, you’ll recall, famously accused Yellen of doing “political things” for Obama, and as alluded to above, it’s not clear that Trump understood the difference between Yellen’s dedication to the post-crisis experiment in easy monetary policy and deference to the executive. And indeed, he needn’t have understood it because when you’re the executive, it really doesn’t matter why the central bank is persisting in accommodative policy, as long as they are.
The ultimate irony, then, is that while Yellen might not really have been “doing political things”, there’s a strong argument to made that Jerome Powell is. Sure, the Powell Fed will couch everything in terms on apolitical policymaking guided solely by their mandate and the incoming data, but there is little question that Trump’s incessant badgering contributed to the FOMC’s epochal dovish pivot in January. Even if you don’t believe that Trump’s intention to fire Powell or his dinner dates with the Fed chair and his deputy directly influenced policy, the president might well have indirectly influenced policy by drawing the public’s attention to balance sheet runoff, thereby heightening market concerns and exacerbating the Q4 selloff. That selloff tightened financial conditions, which in turn informed the Fed’s decision to take a pause.
Well, in light of all the above and considering that Trump has variously characterized the Fed as “the biggest threat” to his presidency and, by extension, to his reelection bid, it’s worth noting that the third year of US presidential cycles turns out to be a pretty good one for stocks.
“The third year of the US Presidential cycle — the one preceding the election year (like 2019) – is special”, BofAML’s Ajay Singh Kapur writes, in the latest edition of his “Inquirer” series.
“US equities have risen in ALL 14 ‘Third Years’ since 1960, with the median rise at 18% [while] EMs were up in 80% of cases in this third year, with the median rise at 14%”, he adds.
(BofAML)
What accounts for that? Well, one possible explanation is policy easing. Here’s Kapur:
Why? In our view, US policy eases in two-thirds of these “Third Years”, helping stocks. This compares with policy easing only one-third of the time in the other three years of the 4-year Presidential cycle. Policy easing before an election? We are surprised.
Note that the bank’s definition of US policy stance includes the fiscal balance (see the methodological note at the bottom of the chart). With US fiscal policy now exhausted, Trump will be forced to lean even harder on the Fed when it comes to bolstering the economy, especially if it takes a turn for the worse.
While the above might not be the most scientific assessment in the world, it does serve to drive home the idea that more often than not, somebody, somewhere may be “doing political things” in the year before a presidential election.
This time around, that group of “somebodies” appears to include Jerome Powell.
Now let’s all laugh again at 2016 Trump explaining (to CNBC no less) that a Fed chair adopting an easy money lean to accommodate a president “is not supposed to be the way it is”…
Again, the Fed’s PACE of tightening and the “autopilot” long-way-to-go comments by Powell caused a major problem, created by them, that they were then forced to deal with. Therefore, the “patience” that Powell is talking about. There are arguments to get rid of the Fed, based on the history of doing more harm than good over the years.
You need to do dig a little more deeply into nineteenth-century American economic history.
Your point being?
The tightrope just keeps getting longer and longer……..pretty soon you just miss a step………..then somebody(s) pays.
I guess Trump’s CPAC speech pretty much confirms that Powell is going to remain under fire up through the election.
But, who appointed Powell? none but our stable genius!
The SA