Can Trump Manage the Economic Cycle?
The current economic recovery, launched out of the cauldron of the 2008-09 financial crisis, continues to percolate. Directly following the 2016 presidential election, many stunned observers forecast numerous types of disaster. So far, those dire predictions have been wrong, although the future always provides lots to worry about
The cancellation of tariffs with Mexico fits the Trumpian pattern of seizing what’s on offer and declaring victory – not difficult when no lines had been publicly drawn in the sand. The president’s 2020 re-election campaign remains an important element in U.S. economic policy (see The Trump Put).
Tariffs on Mexican imports would have been disruptive to sectors such as autos, given the integrated supply chains made possible by NAFTA. Republicans in Congress were considering blocking them. The protracted dispute with China has dampened growth somewhat, but the consequent political pressure has, oddly, fallen more on the Fed than the White House.
Six months ago, Fed chair Jerome Powell carelessly allowed that multiple rate hikes might be coming: “Maybe we’ll be raising our estimate of the neutral rate and we’ll just go to that, or maybe we’ll keep our neutral rate here and then go one or two rate increases beyond it.” (see Bond Market Looks Past Fed).
Those hawkish comments were quickly walked back, while Trump has continued to call for lower rates. Some view this as challenging the Fed’s independence. Ironically, much of the justification for lower rates lies with the constraints being placed on trade with China, policies implemented by the White House. Last week Powell said, “We do not know how or when these issues will be resolved.” He continued, “We are closely monitoring the implications of these developments for the US economic outlook.”
Once again, the Federal Open Market Committee’s (FOMC) “blue dots” are exposing how far behind the market they are. The FOMC’s long run equilibrium rate for the Fed Funds rate remains at 2.8%. Ten year treasury yields, a decent proxy for the average expected short term rate over the next decade, are much lower, at 2.17%.
For years the Fed has been lowering their policy guidance, lagging a process well anticipated by bond investors. Futures markets are predicting almost three rate cuts over the next year, while FOMC projections are for unchanged policy.
On current form, it’s likely the Fed will “independently” grant Trump’s desired rate cuts. Don’t be surprised if Chinese trade tensions are then resolved in time for the election. It seems to be how things work nowadays.
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Trump is not the first President to challenge the Fed. Clinton and Bush II towed the line but Presidents before them routinely challenged the Fed.
Even the founders of the Federal Reserve did not share the view this should be am independent agency. There was a multi-year battle at the time the Fed was created that lasted literally from 1907 to 1913. The conflict centered around the issue that an independent central bank would be run by bankers to the detriment of the nation and, therefore, the Fed, if created, should not be independent.
The record of these men in the Fed has had some successes but some outstanding failures. They are not omniscient and they need to be challenged.
Yes, Trump uses the markets as his guide but he seems to be realizing more successes than just an up market. GDP growth had been solid. Unemployment is at or near all time lows, full employment to be sure. Wages have begun to increase, inflation has stayed calm, and the tariffs are being used as a tool to adjust the failures of pay leaders who has be given away the ship. What other tools are available that are so personal to all economy?
And to your comment re. the threatened tariffs on Mexico “no lines had been publicly drawn in the sand” I would have to question ones eyesight. Mexico has been a.. the… conduit for illegal immigrants crossing over into the USA. With a Congress unwilling to do anything and Trump’s hand proverbially tied, what were his other choices? How quick was the response?
It will be seen if they work but it got Mexico’s attention and something is being tripped to stop the influx. And with that influx is an outflux of BILLIONS of $$$ to support all these people. How good is that for our economy?
We finally have a man…Leader… in the White House who puts America first and half of the inhabitants hate him. Go figure. Yes he tweets, yes he can be confrontational, yes he has said crude things, etc., but who up on the Hill, our anywhere, can, in clear conscience, throw the first stone? We should all be rejoicing as to how well our country is doing and how one man is fighting for its all. Ra!