In Wellington & Co.’s morning note, I noted how China should be saying thank you to President Trump for creating what will likely be an endless trade war between the two largest economies on the planet. Our President has manufactured a villain on Wall Street who is considered the least likely to be branded with such an unenviable title:
Federal Reserve Chairman Jerome Powell.
With the lone exception, albeit a minor one, of President Nixon attempting to interfere with monetary policy measures when he was in office, no President in our nation’s history has done more to influence the independent FOMC into making moves to push the domestic economy into ‘piping hot’ territory than President Trump.
Whether in speeches or social media, the POTUS seems determined at all costs to continue with economic expansion and maintain low unemployment rates.
To be fair, this is what a President should do. Any person occupying the White House should have their finger on the pulse of the American consumer and laborer. They should be concerned if Americans are out of work, having trouble controlling the household balance sheet, and unable to put food on the family table.
But what the President of the United States shouldn’t be doing is forcing monetary moves as a result of tooling with international strategy, as in what the world received this morning in the form of a $75 billion tariff on U.S. goods exported to China.
If the United States receives additional rate cuts, the economy will only become more productive, resulting in added purchases for Chinese-based goods. In addition, a healthy United States economy will also have a trickle-down effect for Europe, which happens to be China’s number one customer in terms of imports.
Was the $75 billion tariff announcement delivered by design to help prop up China’s slowing economy? Perhaps.
At the annual Jackson Hole Summit for Federal Reserve officials, Chairman Powell said the FOMC is willing to “sustain the expansion” of the domestic economy. For the common Wall Street trader, this says Rate Cut all over it.
The only question is how big a rate cut and how low will the Fed go?
The $75 billion tariff announcement occurred only 90 minutes prior to Chairman Powell’s speech, and the entire transcript was delivered to the media only a few minutes prior to him going on. In other words, Powell & Co. are open to any discussion to “sustain” and this decision was clearly made well before Beijing dropped the news about additional tariffs. Can you image attempting to determine monetary policy during a trade war?
Now, looking forward, Wall Street wonders if “sustain” should follow the word “absolutely” because the President of the United States is not going to stop until he sees massive cuts to the Fed Funds rate and, therefore, a thriving bull market leading into the 2020 Presidential Election. Everyone knows a wealthy voter is a happy voter and will most likely pull the lever for the incumbent delivering the returns.
The trade war is a pawn in the game of election chess; and there are very few ways to immediately prop up an economy. Either cut taxes (i.e., fiscal policy), which won’t happen due to the Dems controlling the House, or manufacture wealth in the form of severe monetary policy moves. The President is manipulating the latter, and he’ll likely get his way, which should lead to an easy victory in November 2020.