The Federal Reserve Today: Caught Between Political Theatrics, Economic Uncertainty, & Its Own Institutional-Personnel Caution
A dissection of the Federal Reserve’s current predicament: How Trump’s tariff gambit and Powell’s consensus management have left the Fed staring into the headlights. Tariff chaos, likely collapsing...
A dissection of the Federal Reserve’s current predicament: How Trump’s tariff gambit and Powell’s consensus management have left the Fed staring into the headlights. Tariff chaos, likely collapsing service exports, and a zero-upside (except for the superrich) tax bill: Trump is not getting lower rates solely because of his own policy and personnel choices…
The very sharp Tim Duy sees the FOMC moving towards a rate cut in September, even if things go slightly wrong:
Tim Duy: US: June Inflation on Deck <http://sghmacro.com>: ‘Federal Reserve Chair Jerome Powell… anticipates higher inflation prints over the summer as it takes some time for costs to pass through supply chains. And… full impacts may not be felt until early next year…. This… week… June inflation data… [are] another step… confirming or denying the Fed’s expectations. We continue to see three main avenues that lead to a September rate cut… a weakening labor market… inflation overall/// soft, or even if inflation is hot, it is tied directly to the tariff impacts which the Fed increasingly views as transitory…. A key reason economic models expect tariffs should be a one-time price level change is… anchored inflation expectations. Fed officials have… cited the increase in survey-based measures of expectations as a risk…. However, survey-based inflation expectations have retreated…. [And so] the Fed remains on hold as it waits for this summer’s inflation data…
I think this is not quite right.
Step back a minute: The Thune-Johnson-Trump tax-and-Medicaid-cut bill (I call it what it is, and I put Thune’s name first because his are the driving priorities) is a complete nothingburger, as far as incentives to invest and boosts to aggregate demand are concerned. The tariff chaos is a strong negative for disinvestment in America, as other countries’ decoupling from America-dependent value chains kicks in. Add to that the likely collapse of our education and other services exports, the likely collapse of immigration, and whatever deportations Trump’s goons accomplish that are more than just isolated media events. These are three hurdles that would normally mean that the FOMC should be aiming at a lower interest rate path then it had envisioned back before Trump's election last November.
But nothing is normal.
The biggest non-normal for the FOMC is the tariff chaos.I t would be far from prudent to be certain that the tariff noise is all TACO—Trump Always Chickens Out—performative bullshit. Add to that that the FOMC is well-aware that we got away with a rapid-reopening post-plague and Putin-invasion supply-shock inflation burst in the early 2020s without de-anchoring inflation expectations, but it would be far from prudent to count on getting away with that again soon.
Thus the FOMC is paralyzed. And it is likely to stay paralyzed, pinned by its conflicting imperatives. I think it will take both a weakening labor market and evidence of still-anchored expectations and continued TACO-tariffs for the Fed to cut this fall.
You know, if Trump really does want lower interest rates—rather than somebody to blame should the economy go into a recession—he really has shot himself not so much in the foot as in the head, twice. The TACO Tariff Turmoil is not gaining him anything in terms of PR, but it is paralyzing the Fed and keeping it from cutting rates. And one reason for this paralysis is that Trump placed Jerome Powell in the chair, and he is a manager-consensus builder rather than a policy leader on rates.
7 1/2 years ago Trump decided that the best person in the world to be Fed Chair was Jerome Powell.
He knew then that Jerome Powell was a Republican worthy, a super-manager, a person whose personal network’s center-of-gravity was other Republican worthies. He “judged” and “decided”—if those words still apply, or indeed ever applied, to his cognitive processes—that Jerome Powell was the best person in the world for the Fed Chair Job. Now Donald Trump thinks Jerome Powell is a disaster. But whose disaster is that? Who put him in the chair?
Had Trump wanted a Fed Chair whose mental center-of -ravity was open to the possibility that soft money policies were in fact, optimal, he had at least two super-candidates available 7 1/2 years ago: Janet Yellen and Lael Brainerd. He rejected them both.
This is, putting it politely, a very strong evidence that Donald Trump is not competent at thinking through personnel appointments.
So if were one to give advice to Donald Trump on what he should do to choose his Fed Chair candidate, the only rational advice would be this: Sit down. Shut up. Find someone competent at personnel selection. Give them the baton. Then be quiet: you are not competent to do this aspect of the job of presidenting.
Of course, none of the grifters, sycophants, and liars surrounding him are telling him this—are telling him to assemble a committee and delegate the task.
But why isn’t anybody else giving him this advice. Why not Rupert Murdoch, for example? The family wealth of a Media Baron has a very high beta with respect to the overall health of the economy, does it not? Murdoch is not scared of Trump. Would it not be rational for him to tell Trump, politely, that this is an area (one of many) in which past experience demonstrates that you are incompetent to do the job, so find somebody who actually knows what they are doing and get out of the way?
And why doesn’t every Fed-Trump story lead with the most important fact about the Fed and Trump: that Jerome Powell—whom Trump now fears and loathes—was only a few short years ago the guy Trump was sure was the best choice in the world for the job?
It is one of so many mysteries.
Would anyone but Powell have had the guts to inflate our way out of COVID as Bernanke refused to do out of the financial panic?
https://thomaslhutcheson.substack.com/p/messing-with-the-fed
The Fed's three-way bind:
1) Enormous USG fiscal deficits will at some point require _higher_ interest rates to hold to inflation (or NGDP) targets.
2) Yet in the short run the uncertainties of on again/partly off again tariffs and the labor force reductions stemming from deportations are supply, shocks that may require _lower_ interest rates. And central banks have difficulties explaining that sometimes they need to create more inflation.
3) But such a policy coming at a time when the President is pressuring for lower interest rates could appear to be acquiescing to such pressure and hence would undermine market confidence in the target itself.