This week’s “Headline Risk” comes courtesy of the White House and the dangerous monetary policy it is proposing.
This week’s “Headline Risk” comes courtesy of the White House and the dangerous monetary policy mentality that is rampant throughout the United States.
That the Federal Reserve has become politicized is not news to anyone who paid attention to how Greenspan, Bernanke or Yellen handled their business. But what makes today unique is the public way in which the White House is attempting to manhandle Fed policy.
Not satisfied with the Fed’s response to his December tweets, President Trump directed another 140 characters at Jerome Powell once again on April 14 saying “If the Fed had done its job properly…” the Dow Jones Index would be 20-40% higher and the U.S. economy would be growing at more than 4%.
He ended his tweet rant with “Quantitative tightening was a killer...”
The U.S. is just one quarter removed from the second longest expansion in U.S. history, which occurred against a backdrop of that very quantitative tightening Trump lambasts. On top of that, the government’s very own Q1 2019 GDP calculation showed the U.S. economy accelerated once again. Where’s the killer?
Fast forward to last Friday when Vice President Pence took to the CNBC airways proclaiming: “The economy is roaring” out of one side of his mouth and then minutes later, out of the other side he added, “This is exactly the time not only to not raise interest rates, but we ought to consider cutting them.”
Pence is telling us the economy is roaring, but we need the Fed to lower rates anyway?!
I’m aware these cats are in re-election mode, and a bullish stock market along with a robust economy helps the cause, but this type of “let’s quantitatively ease forever because it juices paper assets” thinking is pervasive in this country (well beyond the White House) and drives me bonkers.
Ten years removed from the financial crisis; artificially low interest rates are as part of the American culture as apple pie. Everyone wants easy money, but they are overlooking huge problems with continuing to go back to the QE well time and time again.
First, if the Fed cuts rates now by President Trump’s preferred 100 basis points (Trump recently called for a 100-basis point cut along with additional QE), what do they do once a recession occurs? Do we go to negative rates like Japan and the Eurozone? From where I’m sitting, that game plan did pan out so well for those economies or their citizens. Back in 2016, a few German banks were actually charging clients for deposits held at their institutions.
Second, and just as critically, rate cuts may pump asset prices (and people’s liquid net worth) in the short run, but it kills the growing population of retirees.
The U.S. is entering a 10-year stretch where a vast number of the 77 million Baby Boomers (23% of the total population) will retire, which means any future rate cuts will negatively impact a growing proportion of the U.S. population that is living on a fixed income. As we sit here today, after three years of slow and modest Fed rate hikes from a zero interest rate base, banks are paying people very little on their deposit rates. Citigroup is the tallest of the pigmies, paying a whopping +0.04% on customers’ cash.
Not to mention that a few rate cuts here won’t re-accelerate U.S. economic growth, its wasted ammunition. And if the Fed does go “negative,” I’ll bet you dollars to donuts that inflation pulls a Superman and goes up, up and away. Once the Fed unleashes the inflation genie, what will they do then?
The headline risk bottom line is that politicians and central bankers can only defy economic gravity for so long. At some point, the U.S. economy will experience another recession, and the Fed will need its full arsenal. If the Fed caves now to political pressure and begins cutting rates before the data dictates, it could have devastating long term implications for not only the U.S. economy but the vast majority of retired folks as well.
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