Complaining about the Federal Reserve’s approach to monetary policy has been one of President Donald Trump’s favorite activities. However, as talk of recession picks up after a temporary inversion of the yield curve, Jerome Powell’s hawkish approach will be a tremendous asset to the U.S. globally. Meaningful stimulus can help put a floor under the Dow Jones as most of the developed world is stuck on interest rates around zero.
Trump was always the market-friendly candidate, but his decision to increase the deficit with tax cuts is going to require a weaker U.S. dollar to fund the debt. Rate hikes in the United States attract capital into the USD, so the President has been pushing back hard against Powell’s tightening. Auto-hikes are now off the table, and Trump and the Dow will be relieved.
They shouldn’t be.
The only reason Powell isn’t hiking is because the economy is no longer looking invincible. The U.S. economy might be the heart of the world’s finances, but it cannot thrive while other major economies like Japan and China are struggling. The ECB looks to have missed the boat to raise rates and is now talking about re-introducing liquidity. The Bank of Japan has remained ultra-dovish, while China keeps opting for more easing to try and ride out a rough patch. The U.K., the world’s fifth-largest economy, also faces tremendous uncertainty over Brexit.
So, should Dow Jones bulls be cutting positions as fast as they can? Not exactly. The decision of the Federal Reserve to hike interest rates may be Trump’s best chance of re-election. By raising interest rates above zero, the U.S. has a loaded gun of stimulus to support the economy.
If the yield curve inverts and the world panics, who can restore risk appetite in investors? Not the Bank of Japan with negative interest rates, nor the ECB which is stuck at zero. China is already pushing stimulus as hard as they can. The U.S. can start a meaningful easing cycle, making the Dow attractive for overseas investors in search of return.
This doesn’t mean the Dow Jones will not be hit in a recession, but it can help it tremendously. Donald Trump loves to use U.S. stock markets like the Dow or S&P 500 as an indicator of the success of his presidency. This is why in the near term, he has opposed Fed hikes, as they have potentially dampened stock markets, and the strong dollar has hurt demand for U.S. exports.
In a bear-market, priorities would shift and the Fed would ease. This means the USD could potentially be hit by an easing cycle, while the rest of the world is stuck on hold. The dollar’s haven status is a potential obstacle to this, but the logic is still valid.
The President might find that what keeps him in pole position is the very thing he has been moaning about for the last three years. If so, he owes Chairman Powell a good bottle of champagne.
Disclaimer: The views expressed in the article are solely those of the author and do not represent those of, nor should they be attributed to, CCN.
Last modified: January 10, 2020 7:09 PM UTC