Donald Trump spent his campaign promising to drain the swamp in Washington, DC. Then he spent the first, pre-Covid part of his term badgering Fed Chair Jerome Powell to drop interest rates to boost GDP and employment.
This was an unusual fight. Monetary policy belongs to the Federal Reserve. It’s a government-sponsored enterprise created by Congress that operates quietly and independently of the president.
Jerome Powell has been more vocal than previous Fed chairs. He granted a rare live interview to the “Today” show earlier this year. Perhaps he’s had to push into the spotlight, to assert Fed independence against Trump.
The president has called Powell an “enemy,” musing whether he or the Chinese president was worse. He called Powell “gutless” for not lowering rates as much as Trump wanted.
Watch Jim Cramer hail this glorious moment for Wall Street bulls:
Of course, this year, Donald Trump got his way. The Fed stomped the brakes on deflation with 0% interest rates in an unprecedented show of suddenness and force. That would send a tsunami of credit pouring through Washington and the financial epicenter of America, the president’s hometown of New York City.
All that money, lent at super low interest, through various Fed instruments like the discount window , to be farmed out for yield, before it debases the currency through inflation– and the government and financial system capture obscene amounts of it on its way through.
This advances the interests of the swamp things Donald Trump promised to get out of our wallets. Could there have been any doubt this would be the outcome of the Trump presidency after he announced in November 2016 that he would nominate Steven Mnuchin for Treasury Secretary?
Donald Trump is playing well with Goldman Sachs, just like Obama, Bush, and Clinton did. He was supposed to protect us from those guys. He ascended to the top of the 2016 Republican primary field with statements like :
I’m not going to let Wall Street get away with murder. Wall Street has caused tremendous problems for us. We’re going to tax Wall Street.
Trump didn’t beat the establishment. He joined it. We’re back to trillion-dollar federal deficits under President Trump. With the CARES Act and other appropriations bills signed and behind us, Obama now makes Trump look like the big government , liberal tax-and-spender.
Now that the Fed is playing Trump’s tune, the president says he’s getting “more and more happy” with Jerome Powell . That was at the beginning of July.
Now the Federal Reserve is delivering Donald Trump the monetary policy of his wildest dreams. Powell announced last week the Fed now has an inflation target . That will likely keep interest rates lower, longer. The Fed is cool with inflation hovering over the 2% target, so long as it averages out later.
It’s about to get dovish in here.
As of Aug 12, U.S. consumer price inflation was 0.8%, up from 0.2% in June . That will give the Fed plenty of room to expand the money supply.
If you’re wondering why stocks are blowing up the sky while the sky is falling, which do you think impacts the mean-reverted, noise-canceled value of a stock more? Behind Door 1: The worst economic data since the Great Depression. Behind Door 2: the U.S. federal funds rate.
It certainly might depend on the stock.
The S&P 500 Index closed down one point the day Powell made the announcement. After markets had another day to digest the news, it finished the week up 0.6% from the morning of Powell’s announcement. It has since surged to new all-time highs again.
By contrast, the Financial Select Sector SPDR Fund (XLF), the largest financial sector ETF , finished Thursday up 1.7% and rallied 2.1% from Thursday morning to close the week. Bank of America rallied 3.2% in two days of the new normal. JPMorgan Chase & Co. rallied 3.8%.
Meanwhile, Donald Trump is cheerleading low interest rates that increase your costs by 2% every year. That may not seem like a lot, but it adds up over the years. Before you know it, after 30 years, they’ve taken almost half your money.