Donald Trump is not a man given to deep thought. He speaks the language of 12-year olds and appeals to the basest elements in human nature. This approach got him elected by the thinnest of margins against an extremely weak opponent in 2016. He parleyed his victory into tax reform and regulatory cuts to extend the economic recovery from the 2008-9 financial crisis. While his regulatory changes are largely beneficial, his tax bill is a mixed bag whose benefits are fading while it blows up the deficit. Thirty months into his first term, federal debt and deficits are exploding.
Mr. Trump likes to boast about strong economic growth and low unemployment. But these headline statistics hide a much darker picture below the surface. The underlying data shows the domestic and global economies deteriorating rapidly. U.S. consumers are under stress and their borrowing costs are rising rapidly. Corporate profits are declining (real corporate profits not bullshit non-GAAP adjusted profits but those are dropping too). The global auto industry is in terrible shape (something Tesla’s delusional acolytes ignore). The semiconductor industry is in deep trouble. Global trade is collapsing and not entirely due to Mr. Trump’s tariffs and other policies such as his attack on Chinese tech giant Huawei that are disrupting the global supply chain. Mr. Trump’s trade policies are hurting economic growth and his re-election chances (which are already very challenging due to a tough electoral map). Both the U.S. and global business cycles are in their late stages ten years after the worst financial crisis since the Great Depression.
During the last decade, global central banks kept interest rates at or below zero. When the Federal Reserve started raising them a couple of years ago, it discovered very quickly (and sooner than many people, myself included, expected) that it could only raise them 250 basis points before markets revolted. In 4Q18, stocks sold off sharply as real (inflation-adjusted) U.S. interest rates poked their heads into positive territory for the first time in years and the Fed said it would keep tightening. But having added a third leg to its dual mandate (low inflation and stable prices) – a rising stock market – it didn’t take Fed Chairman Jerome Powell long to panic and backtrack in January. His announcement that the Fed was done raising rates unleashed a massive rally that returned stocks to record levels that include exuberant valuations and an IPO frenzy reminiscent of the Internet Bubble. The Credit Strategist July 19, 2019
But none of this is enough for Donald Trump. The same man who said during the 2016 campaign that the Fed created a fake economy with low interest rates is now alternately begging and threatening the Fed to lower rates. Politics rendered him a market idiot as he claims the market would be 10,000 points higher if the Fed would just lower rates by 100 basis points and start another round of QE. Sadly, this is far from his most egregiously false public statement, but it is characteristic of the exhausting flood of words vomiting out of the White House on a daily basis.
But yesterday Mr. Trump outdid himself in a very dangerous and disturbing manner. A report that leaked yesterday (the first day of the Fed’s two day June meeting) stating that the White House explored the legality of demoting Fed Chairman Jerome Powell in February. Larry Kudlow, the director of the National Economic Council, did not deny the report but said the president is not considering demoting Mr. Powell at this time. Mr. Kudlow should be ashamed of himself for participating in this kind of blatant attempt to pressure Mr. Powell to lower interest rates. When asked about the report, Trump said “Let’s see what [Powell} does.” Such a threat makes Mr. Trump look more like a mafia don than a president who is supposed to respect the independence of the Fed. But who are we kidding? Trump doesn’t respect anything or anybody unless they are doing his bidding. This kind of behavior directly threatens the independence of the Fed and puts Mr. Powell and his colleagues in an impossible position. If they lower rates now (which would be a bad idea regardless of Mr. Trump’s interference), they look like they are responding to White House pressure. It could cause permanent harm to the institutional reputation of the Fed if they don’t stand firm later today. The Fed should aggressively and publicly assert its independence in a statement rejecting the president’s pressure; ignoring him is no longer enough.
It was no accident this report leaked the day before the Fed is set to make a rate cut decision. Some are calling for an insurance cut of 50 basis points to prevent a recession, which would be a radical move because 50 basis point cuts are only made in dire economic circumstances. Leaving aside the fact that Mr. Trump’s words directly contradict his claims that the economy is robust (hobgoblins run wild in his head), high interest rates are not the problem. The problem is runaway debt at every level of the public and private sector in the U.S. and around the world. Lower rates will just lead to more reckless borrowing and speculation. If the Fed cuts rates now, there is no guarantee it will prevent a recession, but it will definitely leave it with less ammunition to fight a recession when (not if) one arrives. The Fed normally needs 300-500 basis points to fight a recession, meaning the Fed will have to adopt negative interest rates or a massive QE program during the next recession or financial crisis. Coupled with the threat to its independence posed by the president as well as the likelihood the Fed is pushing on a string, the Fed should wait until there is further evidence of a slowdown to take any action.
Michael E. Lewitt