Donald Trump took a few minutes away from castigating “human scum” and building walls in “Colorado” to make some monetary policy “recommendations” ahead of next week’s Fed meeting.
The president long ago gave up on disguising his attempts to commandeer the central bank. He no longer even tries to couch his criticism in terms of an “opinion”. He now speaks as an autocrat would.
“The Federal Reserve is derelict in its duties if it doesn’t lower the Rate”, Trump said Thursday. Even the phrasing (“the Rate”) sounds like it was borrowed from Turkey’s Erdogan.
“Ideally”, Trump said, the Fed will “even stimulate”.
It wasn’t immediately clear what he meant by that. Cutting rates is stimulative.
The Fed of course began expanding its balance again this month, but the effort is aimed not at engineering a glut of reserves, compressing risk premia or otherwise stoking risk appetite. Rather, the aim is to replenish apparently “scarce” reserves and rebuild a buffer in the interest of averting the type of funding squeeze witnessed in September.
Trump has repeatedly insisted that the Fed should restart QE proper. He’s also explicitly called for negative rates on multiple occasions, even going so far as to say that Jerome Powell should cut rates below zero so that Steve Mnuchin can “refinance” the country’s debt.
Read more: Trump’s Call For Negative Rates To Refinance America’s Debt ‘Long Rejected’, Yellen Chides
Last month, Trump called the Fed a gang of “boneheads” in the course of demanding sub-zero rates.
“Take a look around the World at our competitors. Germany and others are actually GETTING PAID to borrow money”, the president reminded his 65 million Twitter followers on Thursday.
As ever, it’s important to remember that while couching things in terms of “competition” makes sense depending on the context, the incessant reference to Germany (and Europe more generally) as a nefarious foreign actor bent on undermining the American economy simply isn’t accurate.
“Fed was way too fast to raise, and way too slow to cut!”, Trump went on to shriek.
The Fed is, of course, expected to cut rates for a third time in as many meetings next week. Trump’s antics are a big reason why – and he knows it.
One reason for Gangster trump to freak-out & spaz-out like a crook, is that he had a deficit problem, and because he is so familiar with at least 5 of his own bankruptcies, he obviously feels panic about upcoming debt/deficit problems which continue to make him look like a lying idiot having a panic attack about the Fed. Although interactions between the Fed and Treasury are complicated, the deficit matter at hand (in a few weeks) places the Fed and Treasury into a unique position, which is related to Fed rates, Treasury yield and issuance (related to debt) IOER (and other rates) and the Congressional Budget, which may of may not be connected to anything connected to Ukraine allocations that were held up illegally.
The following — while long and possibly boring is a very nice road map of what’s happening in terms of this highly confusing mess, which has to do with how Treasury can use the Fed as a tool to adjust its budget DEFAULT … and obviously if the Fed starts a SRF, that becomes a new way for Treasury to play with its debt — and recall, the Fed as a reporting entity isn’t consolidated in budget stuff … more on that later:
Conference Call of the Federal Open Market Committee on
August 1, 2011
MR. ENGLISH
The second group of actions we discussed in our memo involved actions to
address strains in money markets. We suggested potential responses to two different possible situations:
Action 6 involved conducting reverse repurchase operations in response to a squeeze on the supply of
Treasury bills that led to negative bill rates, negative repo rates, and impaired market functioning; and action 7 involved
conducting repurchase operations in response to disruptions to the Treasury repo
market that drove repo rates up meaningfully while the federal funds rate was
relatively little affected. The situation came close to that envisioned for action 6 for a
time, with repo rates around zero, but over the past week, as Brian described in his
briefing, the second scenario emerged; the repo rate rose to about 20 basis points on
Friday and was even higher this morning. With the funds rate up only a few basis
points over the same period, a natural question is whether the repo rate has
idiosyncratically diverged from the overall constellation of money market rates or
whether it is a symptom of broad dislocations in money markets that could interfere
with the transmission of the Committee’s intended monetary policy stance. There
were signs of those wider dislocations late last week, with rates on Treasury bills and
agency discount notes up significantly and contacts reporting that conditions in the
commercial paper market had also deteriorated notably. Moreover, the repo market is
about $2 trillion in size, vastly larger than the federal funds market, and a significant
increase in the rate on such transactions could have a substantial effect on broader
financial conditions. If the Committee thought that conditions in the repo market
were likely to remain strained or even deteriorate further, implying a tightening in
financial conditions that would have adverse consequences for the overall economy, it
could take action 7–for example, by directing the Desk to engage in repo operations
sufficient to maintain the overnight Treasury general collateral repo rate in the same
0 to 25 basis point range as the federal funds rate.
The Committee might nonetheless be concerned that pressures on money funds
could lead them to slash their holdings of Treasury bills, pushing yields on near-
dated bills to very high levels, impairing trading in the bill market, and potentially risking a
Treasury bill auction failing. To help combat disorderly conditions in the bill market
and foster money market rates consistent with the Committee’s target range for the
federal funds rate, the Committee might wish to instruct the Desk to purchase
Treasury bills in that case. Such an approach could be seen as ensuring that the
monetary transmission mechanism is not disrupted and thereby supporting the Federal
Reserve’s dual objectives. Moreover, it might involve less risk of moral hazard than
attempting to establish a broad-based facility to provide liquidity to money funds.
In the fourth group of actions, Brian and I suggested that the Committee could, if
it chose, engage in either outright purchases or CUSIP swaps of defaulted
Treasury securities. Such operations could be warranted if the Committee determined that
there was a need to increase its support of market functioning by removing defaulted
securities from the market. However, such an approach could insert the Federal
Reserve into a very strained political situation and could raise questions about its
independence from debt management issues faced by the Treasury. The Committee
could direct the Desk to purchase a specified amount of defaulted issues in the open
market, as in action 9. Such purchases would not be undertaken to influence longer-
term interest rates, as with LSAP purchases, but rather to address the strains in the
trading of defaulted securities resulting, for example, from operational problems at
the clearing banks, the Fixed Income Clearing Corporation, or the primary dealers.
Of course, unless they were offset by other actions, such purchases would increase
the size of the Federal Reserve’s balance sheet and the supply of reserve balances.
One way to avoid that effect, if the Committee desired to do so, would be for the
Desk to instead engage in CUSIP swaps–action 10 in our memo. In a CUSIP swap,
the Desk would buy a defaulted Treasury security and sell a nondefaulted Treasury
security at nearly the same time, thereby removing a defaulted security from the
market without increasing the size of the Federal Reserve’s balance sheet.
In terms of acceptability, the memo recommends accepting defaulted
-upon Treasuries as collateral. Now
, rating agencies would typically downgrade defaulted-upon securities to D. In
that case, our current collateral guidelines and usual private-sector practices would say that these
securities should not be acceptable as collateral.
Now, I have to say that my own view is that, given our employment mandate and the risk to market function, we should
deviate from this standard practice and be willing to accept the defaulted
-upon securities as collateral, but we need to explain that we’re willing to make such a deviation only
because we expect all Treasuries to be paid in full within a short period of time.
Without such an explanation, our willingness to accept D-rated Treasuries could be viewed as a signal
of our willingness to monetize the federal debt and so undercut price stability … etc., etc …
https://www.federalreserve.gov/monetarypolicy/files/FOMC20110801confcall.pdf