Just one year ago the Fed, under the current chairman Jerome Powell, aggressively raised rates, which promptly resulted in a Twitter storm by President Trump. Describing the Fed as “having gone crazy”, Trump even went as far as trying to get Powell fired. From a political perspective, Trump didn’t want anything to slow down the economy and play against the narrative of his presidency driving economic growth. Less than a year later, the Fed cut rates in July 2019, the first cut in ten years. This was followed by a further 25bp cut in September and the market is now pricing in a 50/50 chance of a further cut at the Fed’s 29-30 October meeting. So, was Trump right?
Back in 2018, the Fed was convinced that the economy was robust and US growth would remain strong. It was particularly weary of the US unemployment rate showing at levels not seen since 1969. Wage pressures were considered imminent. At the time Trump argued that the Fed’s policy was a bigger threat to the US economy than the trade dispute with China. Clearly the Fed had no idea, or at least little evidence to anticipate the scale of the trade war Trump was about to embark on. It began with what now seems like a paltry $34 billion in July 2018, followed by $16bn in August 2018, a massive $200bn in September 2018 and a further $200bn in May 2019. China has responded in kind and both sides continue to threaten to add new tariffs. This gamesmanship has affected global growth prospects, including the USA’s, with the Fed now having to retrace its hiking cycle due to the uncertainty created by Trump’s trade war and economic weakening in Asia and Europe.
One-off boosts from emerging economies now well in the past
Trump clearly has his eyes on re-election and will be keen to blame the Fed for the economic slowdown, and he is not entirely wrong. Whilst the Fed was hoping to normalise rates after a decade of very low rates which are destructive to savings, it probably went too far too fast. The global economy was already showing signs of a slowdown before the trade war took off. A major driver of the global economy over the last decade or two has been the unprecedented growth in emerging markets, including China. This growth was initiated by China joining the WTO, a one-off event, and the globalisation of the supply chain which took advantage of low-cost production gains – again in emerging markets. These gains too were a one-off.
Trump wants the Fed to cut rates further, and the market certainly expects it to do so. How far they decide to go will no doubt bring them in for further criticism, especially from the investment community. The life of a central banker is an unpopular one, but at least in this cycle they are in step with most other central banks, who are all cutting rates in an effort to re-invigorate growth – with the exception of the Bank of England – but that is another matter with its own peculiar domestic concerns.
What would the next administration do?
President Trump’s tenor as President is somewhat uncertain now and it will be interesting to see what his replacement would do if Trump will indeed be impeached. Would his successor row back on the tariffs or be happy for Trump to take the blame for an action that he or she has been a silent witness to?
News this week will be dominated by the expected trade talks between China and the US, as well as growing recessionary fears in the US, building support for a possible further two 25bp cuts by the end of the year.