Well, it’s official. The loop has been closed.
Donald Trump is now calling for the Fed to cut rates, stop balance sheet runoff and, crucially, resume QE. By definition, that means he’s explicitly calling for Jerome Powell to monetize the debt he (Trump) is issuing to fund the tax cuts and the fiscal push.
This was always the logical (or “illogical” depending on how you want to look at things) next step for a president who has gone out of his way to encroach on central bank independence and otherwise demand pro-cyclical monetary policy in the service of deliberately overheating the economy late in the cycle.
Here is what Trump said on Friday morning, following a March payrolls report which showed job creation bouncing back strongly from February when the economy created the fewest jobs since September of 2017:
Got that? If the Fed “dropped rates” and went back to QE, “you would see a rocket ship.”
Unemployment is sitting at a ~48-year nadir and while the latest read on wages suggests the Phillips curve is still “sleeping”, not everyone is convinced the day of reckoning won’t ultimately dawn. Tariffs and protectionism gone wild only increase the chances of inflation eventually materializing, as far-fetched as that might sound currently. If Trump loses control when it comes to his ability to essentially jawbone oil prices lower by bullying and badgering OPEC, the upside risks to inflation would increase.
The Fed has of course already committed to halting balance sheet runoff and, although Trump doesn’t know this, “QE Lite” will begin in October. The Fed’s decision to reinvest principal repayments from agency and MBS securities starting in Q4 subject to a maximum of $20 billion a month translates into the following flow effect (via Goldman):
With an estimated $17bn a month in MBS runoff and the average duration of USTs outstanding at ~54 months (approximately that of a 5y note), this roughly equates to the Fed taking ~8-10bn in 10y equivalents out of the market; that’s compared to $30, 60, and 40bn 10s of monthly purchases under QE1, QE2 and QE3 respectively.
Although that flow is relatively modest, it is what it is – ‘QE-Lite’.
Again, Trump has no conception of that, and even if he did, it wouldn’t satisfy him. He likely wants the Fed to launch a full-on, pedal-to-the-metal QE4 in the service of driving stocks into the stratosphere and lowering America’s borrowing costs amid the ballooning deficit. As a reminder, Trump (the self-declared “King of Debt”) now holds the record for most interest paid in a single year.
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As noted early Friday, there is virtually no chance Trump will let up on Jerome Powell and his phone chat with the Fed chair on March 8 suggests the administration is in no mood to tolerate even a single down week for US equities.
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In the same vein, Trump has repeatedly blamed Powell for short-circuiting the MAGA “miracle”, where that means undermining the president’s campaign promise of ushering in a veritable economic renaissance. Recent broadsides against Powell include Trump’s harangue about “the gentleman at the Fed” delivered at CPAC, an anti-Powell screed during an interview with Fox’s Maria Bartiromo amid the 3M-10Y inversion, and last week’s “had the Fed not mistakenly raised interest rates” tweet.
Never forget that this is the same Trump who once lambasted Janet Yellen for “doing political things” by keeping rates low during the Obama administration. Trump is now demanding the exact same thing (and more) from Powell and the timing (ahead of an election year) means this is the very definition of a “political thing”.
The hypocrisy is startling, even from Trump and it underscores just how far afield the Republican party now is. Trump is demanding that the central bank monetize deficits so he can spend money America doesn’t have at a time when the economy doesn’t need stimulus. That is the very definition of irresponsible and it should rankle the GOP.
But again, I suppose nobody should be surprised, least of all us. After all, we told you this was coming on too many occasions to count, starting in February of last year.
Throw in the decision to appoint a pizza executive who has spent the last couple of years raising money for Trump to the Fed board and the assumed nomination of raving sycophant Stephen Moore, and you’ve got the makings of a scenario where the executive moves to completely politicize the central bank which prints the world’s reserve currency.
Of course the ultimate irony is that had Trump simply swallowed his pride and re-appointed Janet Yellen, he likely would have gotten exactly the kind of Fed accommodation he was after all along without all the drama and without opening himself up to charges of being a dictatorial moron.
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I love that banner
Yes, genius.
Also, if MBS purchases had more of a market impact than treasury purchases, than swapping out long duration MBS for short duration treasuries is in fact QT lite, not QE lite! McElligot recognizes that in the linked post, but no one else seems to…
political things…he now has an entire year to constantly harangue mexico about the border. the goals to met regardingthe border are unacievable as they are unquantifiable…which is exactly how he wants it. the only goal is to have a talking point/scare tactic had can roll out at will right into the teeth of the election cycle.
same idea with china trade…just drag it out but always making progress. china doesnt care either as they need to plan for a big 2020/2021, 100 years of the chinese communist party…to celebrate i am sure there will be plenty of stimulus and liquidity AT THAT TIME..too early and the partys over.
the reason the gop says nothing and few people believe anyone wanring that this is not a smooth sustainable path…is b/c it appears running deficits have no negative impact.. that doing QE has had no negative impact that regular people can see and that few can tell the tale of how it could end up, or shocks that may occur along the way.
wage earning people cannot see that the rocket he refers to is the prices of assets…not wage pressures, not housing affordability, etc. our system currently takes more and more of those wages and puts it into financial markets that push prices up…furthur distancing a wage earner from ever being able to accumulate any of said assets.
I dont know where or when this is going to break. real estate seemed obvious in 2007; tech was apprarant in 1999; today i cant see the obivous thing….unless the bubble is so big its everything everwhere…the only question is will djt be holding the bag when it pops.
If you’re looking for the bubble this go around look no further than corporate balance sheets. Even more ominous is the potential for the bubble to be lurking in the sovereign debt market. You can now be the proud owner of a Greek 10-Year bond that pays you.. 3.5%
The sovereign debt bubble is so large it really is everywhere. It remains the benchmark for all asset prices so by the transitive property an overvalued government bond leads to overvaluation in all other asset prices.
Ok, so next let’s look for signs the world has had enough of the irresponsible BS and moves to shift away from USD as world reserve. If that happens, we’re gonna have some real problems with EM currencies.
What will break first, HY bonds or EM/USD?
If I were to wager a guess, i’d say the next crisis starts in currency markets. The world hasn’t seen a serious currency crisis in quite some time (outside a few select with limited global impact like TRY)
U.S. fiscal and monetary policy is the equivalent of an obese drunk man maxing out his credit cards to buy Bitcoins that he uses to order speedballs to postpone a hangover headache, and then bashing his head against the wall for exercise and the adrenaline rush. I mean, for the first few days it’s fun…