1 big thing: Trump lambasts Fed rate hikes
In an interview with CNBC, US President Donald Trump said “I’m not thrilled,” with the Fed’s monetary policy. He continued by saying, “because we go up and every time you go up they want to raise rates again. I don’t really – I am not happy about it. But at the same time I’m letting them do what they feel is best.”
Trump’s view: “I don’t like all of this work that we’re putting into the economy and then I see rates going up”. He said Trump that his concern was that Fed hikes could “disadvantage” the US since the Bank of Japan and the European Central Bank were maintaining loose monetary policy.
Between the lines: Trump never questioned the Fed’s independence. In fact, Trump specifically said he is letting the Fed do as it feels best. The White House released a statement to that effect as well.
WH statement on Trump interview with @CNBC: “Of course the President respects the independence of the Fed. As he said he considers the Federal Reserve Board Chair Jerome Powell a very good man and that he is not interfering with Fed policy decisions.”
— Eamon Javers (@EamonJavers) July 19, 2018
But the President has also shown a penchant for breaking norms. And so the question is not whether Trump likes Fed policy. The larger issue is whether there is a situation down the line where he would work to reduce the Fed’s independence — and what the consequences would be, both politically and economically.
Why this matters: Monetary policy independence is seen by many policy makers as critical to the Fed’s credibility, and, thus, the credibility of the US dollar. A Fed that is ‘controlled’ by political actors could engage in partisan policy, for the benefit of the party in office but at the expense of its longer-term inflation and growth objectives.
Deeper analysis: Fiscal policy will be under severe political strain given today’s budget deficits. The White House has just revised up its deficit projection for next year to $1.1 trillion. That’s 5.1% of GDP. In a recession, that figure could double. And so, this would put extreme pressure on the Fed to do more of the heavy lifting of boosting the economy. What that means in terms of economic outcomes, though, is hotly debated. But with Trump in the White House, Fed independence will be a big issue if it gets to a recession.
2. Bernanke, Geithner and Paulson warn we’re not prepared for another crash
Monetary policy is particularly important right now because Ben Bernanke, Tim Geithner, and Hank Paulson, the architects of 2008 US crisis policy, are now warning that the US may not have the tools to prevent another crisis.
This coming Sept. 11, the Brookings Institution will host former Fed and Treasury officials to debate what worked and what did not work in the last crisis — and what to do to prepare for the next one.
Geithner: “We let the financial system outgrow the protections we put in place in the Great Depressions and… made the system very fragile and vulnerable to panic….”One of the most powerful lessons from this crisis should be that you want to work very hard to make sure that your defenses are robust.”
Paulson: “The public was angry; they wanted to see us, if not punish the banks, (then) put limits on bonuses…I was totally ineffective at having the American people understand that what we were doing was for them and not for Wall Street.”
Bernanke: “Financial crises, particularly big ones, do tend to get followed by a population reaction; that was certainly the case in the 1930s,” alluding to fascism and war that percolated up during the Great Depression.
Why this matters: Paulson’s comments suggest that the anger Americans felt as a result of the 2008 crisis has not been contained. With Bernanke alluding to the 1930s as an outgrowth of failing to respond to a severe financial crisis, the stage is set in the next financial crisis for a popular revolt.
Deeper analysis: I don’t think the three men are talking about Trump here, though they could be. I believe they are looking forward. And given the loosening of financial system controls, the worry has to be that we will be unprepared for the next financial crisis. The result, they suggest, will be an angry electorate, ready to back anyone who promises to ease the economic turmoil.
3. Trump threatens retaliation against EU over Google
I told you so! The European Union just slapped a Five Billion Dollar fine on one of our great companies, Google. They truly have taken advantage of the U.S., but not for long!
— Donald J. Trump (@realDonaldTrump) July 19, 2018
This is a threat. Given the acrimony between Trump and the Europeans over trade and over NATO defense spending. It has to be seen as such. Trump doesn’t explicitly say why he believes the “not for long” part of his statement. Nevertheless, retaliation – potentially on trade – is the clear suggestion.
In this case, the EU has said Google engaged in “serious illegal behavior”. But Trump is looking past that and threatening the EU because Google is an American company. Will he make good on his threat? If he does, the EU will be forced to react not by relinquishing its regulatory role but by responding to the US retaliatory measure.
Among the key takeaways: The EU is not going to rescind a regulatory decision because of a tweet or even a retaliatory measure from the US. However, if the President’s tweet turns into action, it will make clear that the EU is, indeed, a “foe” of the US in Trump’s mind. The result: in Europe, the US will also come to be seen less as a strategic partner and more as an enemy. And that will cause more European politicians to seek permanent solutions to economic, military and geostrategic issues that do not involve the US.
4. China’s currency continues to slide
Overnight, China weakened the Yuan fixing by the most since June 2016. The Yuan reference rate is now 6.7671 against the US dollar. That’s the lowest in over a year. And all of that weakening has happened in the last three months, since the US – China trade war began.
In just the past few days, in addition to letting its currency plunge, China has cut its 7-day Treasury rate by over 1%, told its banks to flood the system with liquidity, and warned that more easing is to come.
Why this matters: China is in a trade war with the US. Increasingly, it seems that this trade war has become a currency war. The question is whether it is the weakening Chinese economy driving the monetary policy and currency action or whether the Chinese have turned to monetary policy and the currency as weapons to wield in a trade war against the US.
Deeper analysis: One interpretation is that the Chinese are lowering the Yuan under pressure from the foreign exchange market. The fx market may signalling it believes that a larger set of tariffs will mean a weaker yuan. And so, the Chinese willingness to intervene is the only thing stopping an uncontrolled fall in the Renminbi.
Another interpretation is that the Chinese economy is already weakening and that has forced the Chinese to ease monetary policy. The currency depreciation, therefore, is just an outgrowth of easier policy vis-a-vis the US, which is raising rates while everyone else (except Canada) seems to be standing pat.
If one looks at the charts, the Renminbi has been tumbling against the Euro since May even though the Euro itself has been tumbling against the US dollar since April.
Renminbi vs the Euro
US Dollar vs the Euro
This suggests that either politics is a factor in the Chinese currency fall or that the currency effect from the weakening in China’s economy is severe. Either way, the US dollar is strengthening against most all currencies.