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.
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