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The President Is Playing the Fed like a Fiddle

0 | By Shah Gilani

Hat’s off to President Trump. He’s the first President to blatantly call the tune at the Federal Reserve.

Despite the Fed’s supposed independence and pushing back whenever any president attempts to leverage whatever power they think they have, this president just played them, for real.

Here’s what just happened and what it means for markets…

So Much for Independence

The Federal Reserve prides itself on its independence, from politics, from the President, from Congress, and from anyone who dares to threaten the private institution’s power, prestige, or purpose in manipulating interest rates for the benefit of the country’s too-big-to-fail banks.

But the Fed doesn’t make their case for independence, their lackeys do that for them.

Historically, any time any president of the United States wants to expand the economy, especially coming into an election, demanding the Fed lower rates to stimulate growth, they’ve made their case privately to Fed chairmen and only on rare occasions made their case publicly.

Sometimes they’ve been successful, but not too often.

Any time any president has dared to take the Fed to the mat publicly, they’ve been backhanded by Fed lackeys who rail how important it is for the country to have an independent central bank.

President Trump’s different.

He’s been the most publicly vocal critic of the Federal Reserve and its chairpersons, ever.

For their part, the Fed’s pushed back by having their shills write their op-eds and sound off on the importance of the Fed’s independence from political interference, especially Trump’s tweets.

Even the President’s blistering attacks on the Fed’s rate hikes through December last year were ignored by the Fed and deflected by its supporters.

The stock market’s negative reaction to Fed rate hikes was what caused the central bank’s public reversal of policy late last year, not any politician’s or any chief executive’s howling criticism.

Then everything changed.

President Trump’s administration has planned a sweeping overhaul of Fannie Mae and Freddie Mac since before he took office.

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So now with the new normal, President Trump found the magic formula, or maybe solved the elusive equation, that when mixed together or added up, forces the Fed’s hand, publicly.

The Fed’s backtracking on rate hikes in late December was accompanied by rhetoric about fear of economic uncertainties over trade wars.

That was music to the President’s ears. He knew he could play the China card to force the Fed’s hand.

On Monday this week President Trump repeated his frequent accusation that China manipulates the yuan.

“China is intent on continuing to receive the hundreds of Billions of Dollars they have been taking from the U.S. with unfair trade practices and currency manipulation,” he wrote in a series of tweets. “Are you listening Federal Reserve? This is a major violation which will greatly weaken China over time!”

And down went equity markets.

And up went the chance, make that certainty based on fed fund futures, that the Fed would cut rates again in September, and probably again later this year.

Any rebound in equities we see on the heels of last week’s selloff, based on investors’ distaste of the Fed’s lowly 25-basis point cut, culminating in Monday’s across the board equity drubbing, is in anticipation of at least another cut or even multiple cuts likely to come.

The bond market’s rally, besides being a flight to quality move by investors, was moreover a reaction to the likelihood the Fed would have to cut rates, multiple times, based on President Trump’s moves and pronouncements.

What particular pronouncement? That would be the Treasury Department, President Trump’s Treasury Department, labelling China a currency manipulator.

Everyone knows, especially the Fed, that as other countries lower the value of their currencies, including China of course, the value of the U.S. dollar rises in relative terms.

Other countries knock down their currencies to make their exports cheaper in global markets, especially to U.S. consumers.

By focusing on China and pointing to its currency manipulation, because China has had to knock its currency to counter the economic slowdown its facing as America increases tariffs and taxes on its exports here as part of the President’s trade battle tactics, the President is focusing the Fed on the dollar’s value.

The stock market selling off so dramatically on Monday was a direct consequence of official pronouncements on China’s currency manipulation and certainly got the attention of the Fed.

That’s what I call Fed manipulation, par excellence.

Another rate cut is definitely coming now, definitely.

The President’s even given the Fed cover to cut without making it look like he made them cut.

They can point to the dollar’s strength relative to other currencies and how that’s affecting U.S. equity market earnings, since a stronger dollar reduces international earnings when those earnings must be reduced when tallied in more expensive dollars.

They can point to how a stronger dollar makes inflation more elusive.

Or they could point to how the market’s been reacting to global uncertainties, which is their standard rate reducing rhetoric these days, and doesn’t lend them to being criticized for kowtowing to the President.

Whatever they say when they cut in September, we’ll know they’re dancing to the President’s tune.

How’s the new normal waltz going to crescendo?

I’ll tell you on Friday.

Sincerely,


Shah

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