On Monday, August 20, 2018, Donald Trump stated in an interview his disappointment in his new Fed chair. In reference to Jerome Powell, Trump said, “I’m not thrilled with his raising of interest rates. No, I’m not thrilled.”
Trump also said, “We’re negotiating very powerfully and strongly with other nations. We’re going to win. But during this period of time, I should be given some help by the Fed. The other countries are accommodated.”
In other words, Trump wants help from the Fed in pursuing a weaker dollar policy, or at least a less strong dollar policy. Trump is a mercantilist. This is why he promotes tariffs, which are nothing more than taxes imposed on imported goods. He also promotes, if not always explicitly, a weaker dollar policy. These policies that he promotes make consumer prices higher for Americans than they otherwise would have been.
During his campaign, candidate Trump criticized the Fed for a loose monetary policy and said that the stock market may be in a bubble. That was about two years ago. If stocks were in a bubble then, then what are they now?
Now that Trump “owns” the economy, his position has of course changed. He wants low interest rates from the Fed. He does not want tight money. He wants the boom (artificial or not) to continue on his watch.
The problem for Trump is if the boom goes bust, especially before his November 2020 re-election bid. It is hard for the president to disown the economy anyway, but it will be especially hard since Trump has not shied away from taking credit for the supposed good times.
If there is one thing you can say about Trump, it is that he has exposed a lot of dirt and corruption that goes on in Washington DC. Sometimes it is intentional on his part, and sometimes it is unintentional. Much of it is due to his personality, and it also helps that we live in the Internet and social media age where communication is wide open.
In the case of the Fed, Trump’s comments just show that the Fed is not some independent agency. It is perhaps independent of Trump, and that is why he is criticizing it. Trump nominated Powell for Fed chair, and he expected Powell to push for Trump’s policies. But in a certain sense, the Fed is no different than the CIA, FBI, or NSA. It is part of the deep state, or establishment, if you will. The Fed people will seek to protect themselves, and they will try not to rock the boat.
If the economy gets into trouble similar as in 2008, then you can rest assured that the Fed will engage in a loose monetary policy once again. Of course, I say this facetiously in the sense that the Fed’s previous loose monetary policy has created the bubble that we are in now.
The Fed is not going to accommodate Trump, but it is part of the establishment that seeks to generally maintain the status quo. Why would Fed members want anything different? The status quo gives them their power and prestige. It would take a really principled member to seek doing the right thing while destroying his own power. Any such member would have to be very secretive about his true beliefs in order to get into such a powerful position in the first place.
On the same day as Trump’s comments, the 10-year yield dropped. The financial media headlines said that yields were dropping on Trump’s comments about the Fed. Of course, the financial media typically look for explanations for any major market moves.
However, even Trump’s comments did have an impact, why would the 10-year yield move so far? The Fed controls short-term rates to a much greater degree, at least in the short run. But if you look at the yields on August 20, the yield on the 3-month Treasury actually went up by 0.01 for the day.
In other words, on the same day that Trump made these comments and the financial media were saying that yields were falling because of these comments, the yield curve was actually flattening. Short-term rates stayed about the same or even went up slightly, while long-term rates fell.
I have no idea if this yield curve flattening had anything to do with Trump’s comments, and neither does anybody else. Maybe the yield curve would have flattened that day without Trump’s comments too.
The yield curve has not inverted yet. It is still upward sloping, but it is considerably flatter than it was a year ago. This means that the longest bull market ever in stocks may be coming to a close finally. But with any bubble, it usually lasts a bit longer than you would think possible.
If Trump wants to avoid a recession on his watch in his first term, then he is right to push for lower interest rates from the Fed. This would prolong the malinvestment (the bubble activities). It makes us poorer in the long run, but it covers up the misallocations for a while longer. It would make the correction that much harsher in the future.
Fortunately, the Fed is not listening to Trump right now. It has had a policy of tight money since the end of QE3 in late 2014. The problem is that the public knows that the Fed puts an implicit guarantee on the bond market. The investing public knows that the Fed stands willing to inflate at a moments notice if and when the economy turns bad.