Trump’s Scapegoat — Jerome Powell, in Danger of Getting Fired
Author: Greg Valliere
May 29, 2019
WITH THE NEWS FROM CHINA GETTING EVEN WORSE OVERNIGHT, it’s increasingly likely that the stock market is headed for a volatile ride, as we wrote yesterday. For a president who views the markets as an arbiter of his success or failure, there are few options for Donald Trump, who has begun to lower expectations on a China deal.
FAINT HOPES OF A TRADE AGREEMENT have decreased further as telecom giant Huawei battles U.S. restrictions, prompting Beijing to consider curbing shipments of its so-called “rare earths” to the U.S. These 17 crucial chemicals are used globally in the manufacture of high-tech goods. “Don’t say we didn’t warn you,” the Chinese Communist newspaper proclaimed overnight.
THE LIKELIHOOD OF A PERSISTENT TRADE WAR and softer U.S. economic growth is a direct threat to Trump’s re-election, which looks shaky already because of a shift in the electoral vote outlook in the Rust Belt and, perhaps, in farm states. So what are Trump’s options to accelerate economic growth? Fiscal policy already is extremely stimulative, and an infrastructure bill looks unlikely.
MONETARY POLICY IS THE KEY FOR TRUMP, whose rants against the Fed during his trip to Japan were obscured by other controversies such as his scathing assessment Joe Biden’s capabilities. But make no mistake — Trump is convinced that the Fed is the key to his re-election, and he will amp up the pressure on the central bankers. He wants rate cuts.
TRUMP’S ARGUMENT THAT THERE’S NO INFLATION will be tested this summer, thanks to surging gasoline prices and the impact of much higher tariffs that are forcing some U.S. businesses to raise prices. Fed Chairman Jerome Powell has been very clear — the Fed wants its favorite inflation indicator, the personal consumption expenditure deflator, to hit or slightly exceed 2%. If that happens by autumn, the case for a rate hike could actually diminish.
WITH THE TREASURY TEN YEAR BOND yielding below 2-1/4% this morning, fears are growing that GDP growth could slide below 2%, starting in this quarter, but we continue to believe that the Fed is in no great rush to cut rates (especially since the bond market is doing the heavy lifting). Failure by the Fed to move will set up an epic clash between Trump and Powell later this year.
WE BELIEVE TRUMP WILL ESCALATE HIS ASSAULT ON THE FED, making it quite clear that he wants Powell out. As we wrote earlier this spring, the laws are vague on firing agency chiefs like a Fed Chair — but there’s enough flexibility in the language for someone as unorthodox as Trump to seek Powell’s ouster. This probably would be litigated — and a fight of this magnitude, with potentially disastrous market consequences, could force Powell to throw in the towel for the sake of the economy.
EVEN IF POWELL REFUSES TO LEAVE, resisting a Trump barrage, the President would have his scapegoat: weaker economic growth, Trump will argue, isn’t his fault — it’s Powell’s fault. Trump said as much in Tokyo, asserting that the economy would be stronger and the Dow Jones average would be 10,000 points higher if the Fed hadn’t raised rates last year.
BOTTOM LINE: We doubt there will be two rate cuts in the second half, as the markets apparently believe. If the Fed refuses to comply with Trump’s demands, he will attempt to replace Powell, in our opinion. Congress will express outrage but do nothing, and he can drag this out in the courts past the 2020 election. Do not underestimate what Trump is prepared to do in his bare-knuckles fight for re-election.
The views expressed in this blog are provided as a general source of information based on information available as of the date of publication and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Speculation or stated believes about future events, such as market or economic conditions, company or security performance, or other projections represent the beliefs of the author and do not necessarily represent the view of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and AGF accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Any financial projections are based on the opinions of the author and should not be considered as a forecast. The forward looking statements and opinions may be affected by changing economic circumstances and are subject to a number of uncertainties that may cause actual results to differ materially from those contemplated in the forward looking statements. The information contained in this commentary is designed to provide you with general information related to the political and economic environment in the United States. It is not intended to be comprehensive investment advice applicable to the circumstances of the individual.
AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), Highstreet Asset Management Inc. (Highstreet), AGF Investments America Inc. (AGFA), AGF Asset Management (Asia) Limited (AGF AM Asia) and AGF International Advisors Company Limited (AGFIA). AGFA is a registered advisor in the U.S. AGFI and Highstreet are registered as portfolio managers across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. AGF AM Asia is registered as a portfolio manager in Singapore. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.
About AGF Management Limited
Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.
For further information, please visit AGF.com.
© 2020 AGF Management Limited. All rights reserved.
