As is his wont, Donald Trump was once again making headlines this month with a bold and provocative declaration. In a television interview, Trump said that if he were elected president, he would replace the unacknowledged legislator of the economic world, Federal Reserve Chair Janet Yellen. She’s a Democrat, and Trump said it would be “appropriate” for him to appoint a Republican.
Not that he disagreed with her policies. Describing himself as “the king of debt” — a moniker not altogether unearned, given The Donald’s penchant for borrowing and re-engineering debt in his business career — Trump said that he favoured the Fed’s current low-interest–rate stance, and that the United States needs to “very careful” with monetary policy.
Of course, Trump got flack for this, in part because ousting the Fed chair would go against recent presidential behaviour. Democrats Bill Clinton and Barack Obama both inherited and then re-nominated Republican chairs (Alan Greenspan and Ben Bernanke, respectively).
Expected positive U.S. data takes the spotlight this week as tide turns the other way in CanadaBill Gross, Mohamed El-Erian warn against counting out the Fed on the rate hike frontU.S. jobs growth lowest in 7 months, casting doubt on further Fed hikes this year
There’s also the minor matter that the President can only fire the Fed lead “for cause,” which would mean Trump would have to make a case for malfeasance or gross incompetence. Unlikely.
Then there’s the optics challenge: If Trump makes the Oval Office, it would effectively render Yellen a lame duck from November until whenever he gets around to replacing her – which would be, you know, not good.
But perhaps the most biting criticism of Trump re Yellen was that it was another case of him flip-flopping on policy. Last fall, Trump blasted Yellen for playing politics and supporting the Obama administration by not raising rates when she should have. Now he’s in favour of the Fed’s low-rate regimen. What gives?
Well, far be it from me to divine what Donald Trump is thinking, or even what he’s really saying. But if it’s that the Fed should have raised rates earlier, then he may well have a point.
Let’s avoid the Trumpesque territory of whether Yellen’s holding on zero interest rates for so long was politically motivated. (She has quite soundly denied that party affiliations enter into Fed deliberations.) Rather, the argument has to do with the Fed’s reluctance to hike when it looked like the relevant economic indicators were all on the upswing.
That would be a period dating back to at least 2014, when job and GDP growth, among other data, were still going strong in the U.S. In the second and third quarters of 2014, for instance, the employment rate was on a steady incline, and GDP growth was easily exceeding four per cent — a mark it didn’t achieve in any quarter in 2015.
Of course, hiking rates in the first quarter of 2014, when GDP fell by 2.9 per cent, would have taken superhuman foresight and courage. We want monetary policy to be forward-looking, but in the depths of a possible recession, that’s a lot to expect.
All of this is hindsight, of course, and doesn’t matter any more to investors now than whether Donald Trump has flip-flopped again. What does matter is what the Fed will do next. And it might not be so clear as current expectations suggest.
On the surface, it looks like the time has passed for the Fed to resume tightening. GDP growth in Q1 this year came in at a mediocre 0.5 per cent. Employment growth has slowed. Inflation has tailed off to below 1 per cent after reach 1.4 per cent in January. Equity markets freaked out that month after the Fed’s late-year interest rate increase. Now they seem to have stabilized. Why would Yellen upset the apple cart again?
Expectations for another rate hike coming out of the Fed’s next policy meeting in June are extremely low: The federal funds futures rate suggests the markets give it less than a 10 per cent chance. But hey, it could happen — if the Fed thinks it can get out ahead of an upswing and mute the adverse impact of an increase.
Yes, the first quarter was poor in terms of growth, but then again, that’s nothing new. U.S. GDP declined in the first quarters of 2011 and 2014, and has declined from the previous quarter in six of the past seven years. In five of those six years (not counting 2016, obviously), growth has rebounded sharply in the second quarter. So has inflation.
Meanwhile, recent labour market data was not all bad. While hiring was down, job openings were up and layoffs were down. Retail sales last month were the strongest in more than a year.
On balance, it still seems unlikely that Yellen will surprise investors (and presumably disappoint Trump) by raising rates in June, especially given low inflation and dovish signals from the Fed. But that’s the thing with monetary policy: If you made a move only when all the evidence supported it, it would already be too late.
These days, when it comes to changing political positions or shifting monetary policy, we shouldn’t be too surprised by surprises.