At a time when Fed officials are struggling mightily to beat back the barbarian STIR traders at the gates, Donald Trump is openly calling for negative rates – again.
“As long as other countries are receiving the benefits of Negative Rates, the USA should also accept the ‘GIFT'”, the president said Tuesday.
He then shouted “Big numbers!” into the digital void. It wasn’t immediately clear what he meant.
You might be inclined to say this is nothing new, and you’d be right, but you should note that Trump is effectively encouraging the market to keep a foot on the Fed’s throat when it comes to pushing the envelope on a cut into negative territory.
Simply put: That’s a very “uncool” thing for the president to do.
Futures started pricing in NIRP in the US last week, much to the chagrin of Fed officials, who are now at pains to talk the market down without coming across as hawkish during a modern day depression.
Every Fed speaker the market has heard from this week has attempted to downplay the idea of pushing rates negative, but the problem is always the same. Any effort to reclaim some shred of independence from a market that’s angling to enslave policy, risks precipitating a hawkish outcome at a decidedly inopportune time.
That’s the trap. The market prices the Fed into a corner, forcing officials to choose between their independence and a possible tightening of financial conditions which could occur if any push back is seen as being too aggressive.
This can become self-fulfilling.
Trump figured this out long ago. Indeed, last summer he appeared to use tariff threats to encourage traders to price in rate cuts. Once those cuts were priced in, the Fed found itself in a terrible position: Either acquiesce, or risk catching the market offsides.
Now here we are again – witnessing the same dynamic. Only this time, the stakes are far, far higher. The Fed can’t go negative – not really. The plumbing of the US financial system isn’t really set up for that, and policymakers have repeatedly said it isn’t desirable.
“I would be against negative rates”, Robert Kaplan said Tuesday. “Negative rates aren’t a good solution for the US”, Jim Bullard remarked. Neel Kashkari weighed in too: “There are other tools we would go to first”.
That pushback comes on the heels of likeminded comments from Bostic and Evans on Monday, and one assumes Jerome Powell himself will say something similar in a planned address on Wednesday.
It is entirely fair to suggest that Trump’s public exhortations will serve to egg on anyone keen to push this bet. And that’s egg on Powell’s face.
Just Tuesday, for example, Bloomberg’s Edward Bolingbroke flagged “the first significant volumes” in Jun21 Eurodollar call strikes corresponding to deeply negative US short-term rates by midway through next year. About 10,000 EDM1 100.375 calls were bought at 3.5, a US-based trader said.
Jeff Gundlach grabbed headlines last week with a characteristically hyperbolic tweet calling negative rates “fatal”.
On that note, I’ll leave you with the following highly amusing response from one member of the Twitterati.
— Jedimarkus (@jedimarkus77) May 12, 2020