I would have loved to have been a fly on the wall at yesterday’s confrontation meeting at the White House between Donald Trump and Fed Head Jerome Powell.  They apparently had a convivial 30- minute chat where Trump lambasted, laid out his concerns the US is putting itself at a competitive disadvantage in terms of higher interest rates and a strong dollar. These factors have failed to fuel inflation and heightened trade tensions with EU and China. Trump protested his view US rates should be lower than competitors because, er, the US is the US.

Its an interesting take on economics. Low rates typically mean a weak economy. But, you can see Trump’s perspective – if money to invest is cheap and abundantly available, then it stands to reason entrepreneurs should be borrowing loads to invest in new plant. But reason is precious and rare commodity. When working out the value of any investment, low rates and higher relative returns elsewhere mitigate against risky new ventures and towards available financial assets – for instance; stock markets. That’s the brutal reality of the last 10 years – all that lovely money central banks created through QE, that was supposed to fuel growth through economic multiplier effects, got sucked into the stock market swamp.

You live and learn… It makes me wonder where all the current liquidity the Fed is pumping into the short-end – which definitely isn’t QE except that in just about every way it is – is going? Weaker dollar? Yeah, but… Europe and Japan are also pushing the Yen and Euro lower.

Powell apparently stood his ground in front of Trump – making clear Fed policy will depend entirely on what the releases and data show in terms of the economic outlook.  According to the WSJ, Powell told Trump rate decision are: “based solely on careful, objective and non-political analysis.” How the Fed reacts to slowing growth, or the risks that tying themselves to low rates will leave the cupboard empty if a real crisis develops, are for the Fed to determine.

Based on Trump’s previous form I would predict we’ll be seeing the Trump-Fed twitter stream ramp up negativity on the Fed’s decision making in coming months, seeking to pin blame on the Fed for any downturn, and seeking to juice the economy ahead of the Nov 2020 election. Trump clearly perceives Powell as a disappointment – he appointed him to the post, and expects Powell to support him. How dare the fellow go against him… as he  said last year: “I’m not even a little bit happy with my selection of Jay.”

The issue of Fed vs President is not going away – while the market broadly believes Powell’s and the Fed’s independence is sacrosanct, and Trump can’t sack him, it damages the credibility of the Presidency that Trump still tries to bully the Fed. But – critically – it shouldn’t have that much effect on markets, because we all know that’s just the way it is…

Bill Blain is a well-known City of London commentator, and has 35 years’ market experience as an investment banker. He currently is Strategist at Shard Capital, a London-based boutique.

Republished from the Morning Porridge by permission.

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