Donald Trump was fit to be tied on Monday, and despite the nascent rebound in US stocks (contingent on the White House not disappointing the market after promising to deliver a “massive” economic relief package), he’s still upset.
Although the Fed delivered a 50bps emergency rate cut last week and upsized repos on Monday ahead of a limit-down cash open for equities, Trump wants more. In other words, he’s a lot like STIR traders and Wall Street, who are now essentially demanding rates be cut back to zero.
Trump, though, resorted to slander on Tuesday. “Our pathetic, slow moving Federal Reserve, headed by Jay Powell, who raised rates too fast and lowered too late, should get our Fed Rate down to the levels of our competitor nations”, the president seethed, in an angry series of tweets. “They now have as much as a two point advantage, with even bigger currency help. Also, stimulate!” Here, for reference, is the comparison:
This “comparison” isn’t apples-to-apples. Different policy rates are appropriate for different economies and Trump still doesn’t understand (or refuses to admit) that one reason rates are higher stateside is that the economy is in better shape.
The cognitive dissonance inherent in Trump marveling at the policy rate divergence while simultaneously bragging about how much better the US economy is compared to his “competitors” is astonishing, albeit not at all surprising.
Trump went on to insist (we moved beyond asking a long time ago) that the Fed “must be a leader, not a very late follower”.
The Fed has, of course, been expanding its balance sheet in an effort to replenish scarce reserves following the September repo squeeze. Many commentators attributed equities’ inexorable run to new peaks to the open liquidity spigots, but over the past three weeks, the COVID-19 panic has simply overwhelmed any bullish impulse from the Fed’s reserve management operations.
QE “proper” (i.e., buying assets with the express intent to compress risk premia and drive investors out the risk curve and down the quality ladder) might help, especially given the support it may provide for lower-rated borrowers, but right now, it’s highly unlikely that anything monetary policy can do is going to be particularly effective.
Trump’s latest exhortations come after multiple banks revised their forecast for the Fed to reflect a return to (or close to) the lower bound in light of the virus. The Fed hasn’t traditionally shied away from moving in election years, and 2020 certainly won’t be an exception.
The Fed’s first term repo since yesterday’s upsizing announcement was more than two times oversubscribed, and there have been signs of dollar-funding pressure building up over the past week.
Whether Trump knows anything about that is debatable, but he’s unwittingly arguing for the same raft of measures that some short-end strategists are openly calling for – namely, rate cuts, liquidity lines, a promise to use swap lines, an uncapped repo facility and, if push comes to shove, QE.