Four months ago I published an article titled, ‘The Economic Deception of Candidate Trump vs President Trump‘, in which I mapped out the inconsistencies of Donald Trump’s stance on the American economy from when he was campaigning to be President to when he became commander in chief.
Candidate Trump was highly critical of the Federal Reserve’s policy to keep interest rates artificially low throughout Barack Obama’s presidency. Trump described the ensuing highs in the stock market as a ‘bubble‘, warning that if the Fed reversed course and began to raise rates after Obama left office the U.S. economy could implode as a result.
By contrast, President Trump has glorified the ‘bubble‘ in equities that he spent years denouncing as a fake economic recovery. With the Dow Jones routinely breaking record levels up to January 2018, Trump took to Twitter to speak of how this was a demonstration of the ‘Make America Great Again agenda.’ As he pushed this perception, the Federal Reserve were quietly raising interest rates and rolling off assets through their balance sheet reduction programme. So far, they have raised rates five times since Trump has been in office, compared to just one rate hike in eight years under Obama.
The most notable difference between these two variations of Donald Trump is that as soon as his victory was confirmed in November 2016, public condemnation of the Federal Reserve’s actions evaporated. Criticism of the Fed’s outgoing chairwoman, Janet Yellen, turned to praise. During his first eighteen months in the White House, Trump had little if anything to say about the central bank.
That was until July 19th, 2018, when Trump sat down with CNBC presenter Joe Kernen to discuss his presidency.
I put a very good man in the Fed (Jerome Powell). I don’t necessarily agree with it because he’s raising interest rates. I’m not saying that I agree with it. I’m not thrilled because we go up and every time you go up they want to raise rates again. I am not happy about it. But at the same time I’m letting them do what they feel is best.
Criticism of the Federal Reserve from a sitting President is seen as a rare occurrence. But given that Trump has form when it comes to criticising American based institutions (the CIA and FBI being a couple of examples), it was inevitable that he would sooner or later target the Fed.
Why might Trump have chosen this moment to express concern with the bank’s policies, though?
In the same CNBC interview, Trump stated that he would be prepared to introduce trade tariffs on all Chinese imports ($500 billion in total). For many months now the escalating rhetoric between America and China, as well as subsequent tariffs levied by both countries, has been described as the beginnings of the ‘Trump Trade War‘. The identity of this trade war being in Trump’s name is key as we shall learn.
This is not the first time that changes under Donald Trump have been personally identifiable to him. The departure of Janet Yellen at the Federal Reserve and the arrival of Jerome Powell as chairman and several new Fed governors led the media to pronounce the central bank as ‘Trump’s Fed’. The rise in stock prices since 2016 was the ‘Trump Rally‘. Tax cuts for corporations were ‘Trump’s tax cuts.’
As outlined in numerous economic updates through this blog, several figureheads within the Federal Reserve system have expressed concern about the potential damaging impacts of a trade war. In an interview with Marketplace published earlier this month, Jerome Powell was asked about what tools the Fed had at its disposal in the event that a trade war impacted negatively on the economy:
We essentially have our interest rate tool, so if the economy weakens, we can lower interest rates. We can slow the pace at which we’re increasing them. There could be an effect on inflation. I wouldn’t want to, you know, dive into a bunch of hypotheticals here, but I would say, you can imagine situations which would be very challenging, where inflation is going up and the economy is weakening.
Here, Powell gave no specific indication that should a trade war push up the rate of inflation, the Fed would hold off on raising rates and instead opt to support the economy. The Fed’s communications and actions since Trump secured the White House strongly suggest that the opposite is more likely.
To give an example of how central banks are interconnected, in 2017 Bank of England governor Mark Carney confirmed that in the event of a ‘bad‘ Brexit deal and low growth, the bank may not be able to cut interest rates.
The scenario of rising fundamentals such as inflation, coupled with a weakening economy, point to rates going up rather than down (whether in the U.S. or the UK).
During Obama’s tenure as President, the Fed ignored their mandate for 2% inflation, and concentrated instead on maintaining 0% interest rates and performing quantitative easing. This has now been superseded by gradual rate increases and a reduction in the Fed’s holdings of government bonds and mortgage backed securities. A change that only became fully manifest when Trump entered the Oval Office.
In the same Marketplace interview, Jerome Powell professed the importance of the Fed’s independence from government when making policy decisions:
We’re going to do our business in a way that’s strictly nonpolitical, without taking political issues into consideration, and that carries out the mandate Congress has given us. And we have the tools to do that. We have a statute that allows us to do that in a way that is independent of political considerations. I’m strongly committed to it and so are my colleagues.
If we take Powell at his word, this suggests that the Fed will not be susceptible to political pressure from the Trump administration. Meaning, that if actions emanating from the White House have an adverse effect on the Fed’s mandate, they will persist in tightening rather than becoming accommodative.
In my original post looking at Candidate Trump vs. President Trump, I mentioned how the actions of the Trump administration would ultimately give the Federal Reserve the ammunition to maintain their current ‘hawkish‘ stance on monetary policy. If the Fed proved unwilling to change course in the midst of a trade war, it is reasonable to assume that Trump would go on the offensive and attempt to hold the Federal Reserve responsible for any economic downturn.
The problem is that such a strategy would be destined for failure, chiefly because the Fed would present themselves as having no other options in combating the inflationary fallout resulting from ‘Trump’s Trade War.’ In other words, the actions of Donald Trump become a tool of convenience for the Fed. They, along with other major central banks around the world, have spent the last few years honing their communications and have managed to keep market participants on side as the direction of monetary policy changed from stimulus measures to gradual tightening.
Critical to appreciate is that during the cycle of quantitative easing and rates being cut to 0%, the bounce back in stock markets directly coincided with the Fed’s ‘dovish‘ stance. It was cheap money which gave corporations the ability to buy back their own stock and artificially inflate their value. Trump’s tax cuts have kept this process alive, with corporations investing the proceeds saved into buying back more of their stock. The effect of the tax cuts, however, will only be temporary. Once this resource has been exhausted, the rate of stock buybacks will likely decrease. No longer can corporations borrow money at 0%. The consequences of this new reality will eventually become visible by way of a downturn in markets. Stock buybacks are one of the primary reasons why the perception of a ‘recovery‘ since 2008 is illusory.
A decade ago, the Fed became the lifeblood of the market place through its QE operations, and successfully managed to convince investors and economists alike that the inexorable rise in equities was based on solid foundations rather than quicksand. Now that rates are rising and the Fed’s balance sheet is shrinking, mathematically the only conclusion which can be drawn is that the economy will fall into a state of decline.
The exact timing is unknown, but it is safe to predict that it will happen under Trump’s watch, and it will be he who receives the vitriol.
The Hegelian dialectic, whereby the thesis is placed into conflict with the antithesis, is a method in which globalists have utilised over the decades to advance their goals of global governance and the concentration of power and resources into fewer and fewer hands. In this instance, you have the prospect of Donald Trump in conflict with the Federal Reserve. An institution that was conceived by private banking interests over 100 years ago. It is a battle that no President, whether sincere in motive or otherwise, can win.
The Fed have cemented their grip over the U.S. economy over the last ten years. Whilst the sentiments of nationalism / populism will be pilloried as the cause for what may become known as the ‘Trump Depression‘, the Fed will, as always, escape public inquisition. Even though it is they who literally have the fate of the U.S. populace in their hands.