“The only problem our economy has is the Fed. They don’t have a feel for the Market, they don’t understand necessary Trade Wars or Strong Dollars or even Democrat Shutdowns over Borders. The Fed is like a powerful golfer who can’t score because he has no touch – he can’t putt!” (President Trump tweet, 24 December 2018).
Choice of language and interesting use of Capital Letters aside, President Trump’s criticism of a Federal Reserve midway through a hiking cycle has a long pedigree. Indeed, it was the last battle between the Oval Office and the Fed that led to the latter’s independence. In 1951, forced to increase government borrowing to fund the Korean War, President Harry Truman faced a worse threat than just rising interest costs. The wartime bonds that had funded WWII had been sold to Americans on the promise that they would not at any point suffer a capital loss. This put an effective ceiling of 2.5% on future government bond yields. But in 1951, with inflation pushing 20% and government debt set to expand again, the Fed could no longer keep this promise. A tense power struggle ensued between the Fed and the Treasury, with President Truman at one point thundering that raising interest rates was “exactly what Mr Stalin wants”. Ultimately though, the Fed won out – and has enjoyed a functional independence from the White House ever since.
So presidential Fed-bashing may be nothing new, but the tone and circumstances of this iteration certainly are. At the height of Truman’s disagreement with the Fed, the US was on the brink of a nuclear war with China and the Soviet Union. President Trump’s ire seems to have been caused by a 15% decline in the S&P 500 and the Democrats’ refusal to allow him to spend $5 billion on a wall.
Even discounting interference from the executive, the Fed starts 2019 in a pretty unenviable position. On the one hand, investors have been spooked by poor manufacturing numbers coming out of the US and China. Hints that the disappointing figures were due to domestic (and therefore structural) factors rather than a still-preventable trade war did not help matters. As a result, Chairman Jerome Powell has had to expend a significant amount of energy over the festive period reassuring the markets that a “patient” approach will be taken to future rate hikes.
Nevertheless we don’t need to look far to find evidence of inflationary pressures that may force Powell to raise rates more quickly. December saw the creation of vastly more non-farm jobs than expected (312,000) and average hourly earnings growth hitting 3.2%. Meanwhile, GDP growth has now been running significantly hotter than productivity for some time, buoyed by the sugar rush of President Trump’s cuts to corporation tax. Should these factors lead to inflation finally taking off, the Fed may end up having to tighten monetary policy much less gently than it has done to date.
Some years after both the Korean War and Truman’s presidency had ended, he is reported to have accidentally encountered the Fed chairman on the streets of New York, and to have greeted him by shouting “traitor”. A similar tone is once more apparent in much of today’s political discourse. Whether today’s chair will continue to hold his nerve under fire remains to be seen.
For more information, please contact Joshua Roberts, Associate Director at JCRA, at Joshua.Roberts@jcrauk.com.