- President Trump sharply criticized the Federal Reserve this week, saying interest rate increases are hurting the economy.
- Trump will have the opportunity to fashion the central bank in the image he would like as he has four vacancies to fill on the board of governors.
- The result could be a more politicized Fed.
President Donald Trump has multiple reasons as to why he should take control of the Federal Reserve. He will do so both because he can and because his broader policies argue that he should do so. The president is anti-overregulating American industry. The Fed is a leader in pushing stringent regulation on the nation. By raising interest rates and stopping the growth in the money supply it stands in the way of further growth in the American economy.
First, He Can
The Board of Governors of the Federal Reserve is required to have seven members. It has three. Two of the current governors were put into their position by President Trump. Two more have been nominated by the president and are awaiting confirmation by the Senate. After these two are put on the Fed’s board, the president will then nominate two more to follow them. In essence, it is possible that six of the seven Board members will be put in place by Trump.
The Federal Open Market Committee has 12 members and sets the nation’s monetary policy. Seven of the 12 are the members of the Board of Governors. Five additional are Federal Reserve district bank presidents. Other than the head of the Fed bank in New York, who was nominated by the president, the other four can only take their positions as district bank presidents if the board in Washington agrees to their hiring. One of these, the Fed Bank president in Minneapolis, Neel Kashkari, is already arguing for no further rate increases.
Following the passage of the Dodd Frank Act in July 2010, the Fed was given enormous power to regulate the banking industry. It moved quickly to implement a number of new rules. The Fed set up a system that would penalize banks that failed to obey its new rules. These rules included setting limits as to how big an individual bank could be; how much money the banks had to invest in fed funds and Treasurys as a percent of their assets; which loans were desirable and which were not; where the banks had to obtain their funding and many, many, more up to and including how much a bank could pay its investors in dividends.
These rules have meaningfully slowed bank investments in the economy (the Volcker Rule) and they have had a crippling effect on bank lending in the housing markets (other agencies have had an impact here also).
Thus, of all of the government agencies the Fed has been possibly the most restrictive. The president has already moved to correct these excesses by putting in place a new Fed Governor (Randal Quarles) to regulate the banking industry.
Three, Killing Economic Growth
In the second quarter of 2018, the growth in non-seasonally adjusted money supply (M2) has been zero. That’s right, the money supply did not grow at all. This is because the Fed is shrinking its balance sheetultimately by $50 billion per month. In addition, the Fed has raised interest rates seven times since Q4 2015. Supposedly there are five more rate increases coming.
This is the tightest monetary policy since Paul Volcker headed the institution in the mid-1980s. It will be recalled his policies led to back-to-back recessions. Current Fed monetary policy is directly in conflict with the president’s economic goals.
Moreover, the Treasury is estimating it will pay $415 billion in interest on the federal debt in this fiscal year. A better estimate might be $450 billion if rates keep going up. There are a lot of bridges and tunnels and jobs that could be created with this money.
Then there is inflation. It is likely to rise if the Fed eases its policies. If that happens paying down the federal debt becomes easier. On a less desirable note, higher interest rates lower real estate values. Lower rates that stimulate inflation increase real estate values.
The president can and will take control of the Fed. It may be recalled when the law was written creating the Federal Reserve the secretary of the Treasury was designated as the head of the Federal Reserve. We are going to return to that era. Like it or not the Fed is about to be politicized.
- Traders in recent days have been pricing in a higher chance of a fourth Fed interest rate this year.
- For the markets, the debate is why the central bank will hike — if it’s to keep up with economic growth or to tamp down inflation.
- Market strategist Jim Paulsen thinks investors are little too sanguine about the prospects for inflation and could get burned.
Investors are getting more comfortable with the idea of four interest rate hikes this year, though it may not last long.
A steeper rate incline likely will come with increased inflation pressures that in turn could serve as a millstone for a market struggling to post meaningful gains even amid blockbuster corporate earnings.
Think in terms of higher consumer and producer price readings coupled with surging oil prices and a falling dollar, all combining to form a landscape that investors haven’t seen in decades.
“If all that happens to make a fourth hike necessary, I’m not sure the market will be as comfortable as you see at the moment,” said Jim Paulsen, chief investment strategist at the Leuthold Group. “It’s the movement around it that shifts around your feet and makes the environment a lot more hostile.”
Following a series of readings showing that inflation is edging toward the Federal Reserve’s 2 percent target level, traders who make bets on where the central bank is going to put its benchmark rate have indicated more hawkish expectations. As of early afternoon trading Monday, the possibility of a fourth rate hike this year — the Fed already approved one in March — was about 47 percent after reading just below 50 percent earlier in the session.
Optimists have held onto the hope that even if the Fed moves more aggressively, it will be doing so for the right reasons. That would mean strong economic growth accompanied by just a dose of inflation that would push wages higher and increase quality of life without an outsized rise in prices.
The other side is the bleak scenario, where long-dormant inflation rises and the Fed finds itself behind the curve after years of loose monetary policy. The central bank then has to move more quickly than the market anticipates, putting pressure on both stock and bond prices, which move inversely to yields.
Paulsen has been more in the latter camp, even warning that a moderate bout of 1970s-era “stagflation,” or low growth and high inflation, could be on the way.
“The collateral damage around that is going to be much more brutal than what people are currently thinking,” he said. “I don’t think the Fed’s thinking we’re getting runaway real growth. They see the inflation evidence and are thinking it could get worse.”
The U.S. economy grew at a 2.3 percent pace in the first quarter, more than expected but still around the tepid post-recession level.
Fed policymakers had long insisted they were “data dependent” in their decision-making, but the most recent trajectory has looked more like a predetermined path toward normalization from the extreme accommodation that began in late 2008.
Amid this environment, investors will be looking for clues about not only how many times the Fed will be hiking, but also why.
The Federal Open Market Committee begins its two-day meeting Tuesday, with the market not expecting any change in rates but anticipating some shifts in language from the post-meeting statement that will indicate a more aggressive road ahead.
“It really depends on whether it’s perceived that the Fed is ahead of the curve a little bit,” said David Donabedian, chief investment officer at CIBC Atlantic Trust. “In other words, are they responding to a tiny acceleration in the inflation numbers or really reacting to rising confidence in the strength of the expansion.”
“If the fourth rate hike is viewed in that context, it’s not much of a problem for the market,” Donabedian added. “If the inflation number starts to accelerate further it becomes more of a problem. Then the psychology becomes, uh-oh, maybe four isn’t enough.”
Traders actually are pricing in a 7.5 percent chance of a fifth hike this year — minimal, but not zero. The Fed’s job actually has gotten a bit easier in recent days, as the bond market has pushed yields higher on its own. Central bank policymakers, then, will be reacting as much to market dynamics as their own judgments.
Donabedian said he’ll be watching Friday’s nonfarm payrolls report closely for average hourly earnings growth. Should that point to aggressively higher wage pressures, it would suggest a more aggressive Fed and could pressure stock and bond prices, he said.
Forecasters at Capital Economics were one of the first to predict a fourth rate hike, and they see the case only getting stronger in recent days.
“Despite economic activity slowing in Q1, we expect the Fed to press on……..
(screwing up the world economy)
‘Chicken’ George is to blame for the Global meltdown according to distinguished US economist Steglitz.
VIENNA (Reuters) – Former Federal Reserve Chairman Alan Greenspan and the government of President George W. Bush were to blame for the U.S. financial crisis, Nobel laureate economist Joseph Stiglitz said in a magazine interview.
“This man (Greenspan) has unfortunately made a lot of mistakes,” said former World Bank chief economist Stiglitz, according to a preview of the interview to be published on Monday in profil magazine.
Earlier in April, Greenspan said in an interview with CNBC television that the U.S. economy was in recession and defended his chairmanship of the U.S. central bank against charges that his policy missteps had laid the groundwork for the crisis.
He said decisions during his charge had been rationally constructed based on evidence at the time.
Stiglitz said Bush’s government was also to blame.
“I reproach them, that the economy was not as resilient as it could have been due to the ongoing tax cuts and the huge costs incurred by the war in Iraq,” he was quoted as saying.
He said it was a myth that Europe could decouple itself from the United States.
“Especially the weak dollar will continue to hit the European economy hard, because it will make it much harder to export,” he said.
Reporting by Karin Strohecker; Editing by David Holmes
Get Ready for the Unintended Consequences of Trump’s Trade War
By threatening a tariff war with China, Donald Trump has essentially thrown a deck of cards into the air. We don’t know yet where each will land. While it appears that both the U.S. and China would suffer in a trade war, “the pattern of loss is going to be very difficult to predict,” says Jamie Murray, Bloomberg Economics’ chief European economist.
One of the most powerful laws in economics is the law of unintended consequences. As formulated by the American sociologist Robert Merton in a 1936 paper called “The Unanticipated Consequences of Purposive Social Action,” it says that consequences “are occasioned by the interplay of forces and circumstances which are so complex and numerous that prediction of them is quite beyond our reach.”
Donald Trump has asked his administration to formally invite Russian president VladimirPutin to visit Washington later this year, the White House announced on Thursday. Sarah Sanders, the White House press secretary, said Trump asked his national security adviser John Bolton to assist and arrange.
The Senate effectively rebuked Trump for considering Putin’s request to question U.S. officials, including President Barack Obama’s former U.S. ambassador to Moscow, amid rising concern in Washington that the rest of the U.S. government still doesn’t know what happened in Trump and Putin’s private meeting in Helsinki on Monday.
Putin told Russian diplomats that in Helsinki, he proposed a referendum to resolve the conflict in eastern Ukraine but agreed not to disclose the plan so that Trump could consider it, according to two people who attended Putin’s closed-door speech on Thursday.