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.
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.
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.