Good riddance to Esther George and Eric Rosengren – or at least that’s what anyone who favors more Fed cuts come hell or high inflation will be saying in 2020.
George and Rosengren of course dissented against each of the three rate cuts the Fed delivered in 2019, when policymakers carried out what Jerome Powell has been keen to insist was merely a “mid-cycle adjustment”, not the beginning of a full-on easing cycle.
As part of the yearly rotation, George and Rosengren will lose the vote, as will Charles Evans and staunch dove Jim Bullard. Proponents of looser policy need not fret too much about Bullard being relegated to participant/contributor status, though – uber-dove Neel Kashkari is among the four new voters, along with Kaplan, Harker and Mester.
(Deutsche Bank)
At the December meeting, the Fed telegraphed a clear desire to keep rates on hold in 2020, an election year during which Donald Trump will surely call repeatedly for rate cuts.
“Would be sooo great if the Fed would further lower interest rates and quantitative ease”, the president said, in a December 17 tweet, adding that “the Dollar is very strong against other currencies and there is almost no inflation”. The Bloomberg dollar index looks poised to end the year lower, having fallen sharply in October and December, but, as noted on Friday, the greenback has been stubborn over the course of the year, even in the face of a dramatic repricing in the short rate as the Fed pivoted.
Trump has variously insisted that rates should be zero or less in the US, a suggestion nobody wants to hear, not even Larry Kudlow. When Trump suggested in September that Powell cut rates into negative territory so that Steve Mnuchin can “refinance our debt”, Janet Yellen called the president’s monetary musings “long rejected“.
And yet, as silly as Trump’s bullying most assuredly is, the president in 2019 seemingly realized that he does, in fact, have the power to indirectly compel Fed cuts, even if he can’t simply instruct policymakers to act, Erdogan style.
Over the summer, Trump’s trade tweets and intermittent tariff balderdash prompted the bond market to price in Fed cuts, a state of affairs which effectively cornered policymakers by forcing them to either acquiesce to market pricing, or risk wrong-footing rates traders and setting in motion a re-pricing and concurrent tightening of financial conditions.
That is most assuredly an example of the tail wagging the dog, and it’s made more disconcerting by the fact that Trump’s “greatest” tariff escalations are wagging the tail.
(Goldman)
But, it is what it is, and next year will find the White House holding Powell’s feet to the fire again, especially if the economy doesn’t perform as well as Trump would like.
Historically, the Fed has not been shy about acting in election years, as the following chart makes clear.
But 2020 represents a unique challenge thanks to Trump’s public criticism of monetary policy.
While the bar for additional cuts may well be much lower than the bar for hikes, the Fed is acutely aware of the extent to which Trump’s incessant badgering will make lawmakers sensitive to any accommodation delivered in 2020 above and beyond what can be clearly justified by the incoming data.
The irony is always the same: Trump has made it harder on himself by publicly deriding Powell. Now, any attempts to coerce the Fed chair in 2020 will be scrutinized relentlessly, even as Americans have become largely numb to the president’s weekly exhortations to monetary policy easing.
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