Late last month, an academic study by Duke’s Francesco Bianchi and the London Business School’s Howard Kung and Thilo Kind, revealed what the trio described as “market-based evidence that President Trump influences expectations about monetary policy”.
Bianchi, Kung and Kind analyzed the president’s monetary policy tweets using a high-frequency event study and found that “the average effect of these tweets on the expected fed funds rate is strongly statistically significant and negative, with a cumulative effect of around negative 10 bps”.
For the three PhDs, the results suggested Trump’s social media behavior “poses a significant threat to central bank independence”.
The study joined a growing body of sellside research commenting on the same phenomenon, including a straightforward bit of analysis from BofA’s Savita Subramanian and Jill Carey Hall, as well as JPMorgan’s widely-publicized “Volfefe Index“.
As we wrote two weeks ago, it could be that Trump’s influence on short-end rates markets comes about not so much by way of his Fed criticism, but rather because he often pairs that bombast with trade escalations designed to engineer uncertainty and thereby compel policymakers to adopt a more accommodative stance.
Well, Goldman is out with a new piece that seeks to quantify just that by looking not just at the president’s Fed criticism, but also at tweets that implicitly or explicitly threaten tariff escalations.
“For each set of tweets, we measure the impact on market expectations for Fed policy by looking at the change in one-year ahead fed funds futures prices from just before a tweet to 30 minutes after”, the bank writes, in a note dated Monday.
Next, they compare the windows around those tweets to “all other 30-minute intervals of market activity to see whether they see statistically bigger moves”.
After that, Goldman rolls up all of the fed funds futures activity following tweets for each category in order to assess the broader effect on expectations for monetary policy.
Ultimately, Goldman finds that trade tweets matter much more than direct Fed criticism.
For tweets that directly criticize US monetary policy, the bank notes that the distribution of market moves is fairly small, ranging from -2bp to +2bp. That, Goldman says, is “not statistically different from what one would expect in normal 30-minute intervals at the 5% level of significance”. Cumulatively, the move associated with all of the Fed-related tweets in Goldman’s sample is just -10bp.
On trade tweets, it’s a whole different ballgame.
“The market moves are much larger, statistically highly significant, and more clearly skewed to the downside, ranging from -14bp to +4bp”, Goldman says, adding that “cumulatively, the impact on market expectations for the funds rate is about -40bp when we include tweets indicating escalation of trade tensions and tweets indicating de-escalation, and about -60bp when we focus only on tweets indicating escalation”.
In addition to being intuitive (as Goldman puts it, “there are clear channels through which tariff escalation can lead to a dimmer economic outlook”), this is just a validation of what many believe is part and parcel of Trump’s “strategy” around tariff escalations.
Over the summer, it became fairly obvious that the president was wielding the tariff gun not just to generate leverage in negotiations with America’s trade partners abroad, but in fact to engineer rate cuts at home by creating so much uncertainty that the Fed feels compelled to act.
Remember, this works two ways. The straightforward transmission channel simply involves the Fed responding to the perception of heightened trade tensions and the assumption that those tensions will manifest themselves in adverse economic outcomes.
But the reason trade threats are such an efficient tool for Trump when it comes to forcing easier monetary policy is precisely because of the outsized impact those threats have on market pricing. The more cuts the market prices in, the more dangerous it is for the Fed to disappoint those expectations, as wrong-footing the market risks bringing about an acute tightening of financial conditions.
That, folks, is how Trump managed to make Fed cuts a self-fulfilling prophecy.