Trump’s dot plot for the Fed

Here’s a rare monetary forecast from me. At the Federal Reserve’s next but two open market committee meetings in mid-September, US inflation numbers have begun to turn the right way. The data will finally permit chair Jay Powell to cut the prime rate by a quarter of a percentage point. Though it will be the first and last cut before the presidential election, Donald Trump goes haywire. Here is the monetary arm of the deep state revealing its liberal bias, he will say. Just as Powell refused to cut rates in 2019 when Trump was publicly cajoling him to do so, now he is loyally obliging Joe Biden a few weeks before the election.

So what, you might ask. That is just Trump being Trump. There are greater things to worry about, such as his plans to deport millions of illegal immigrants and invoke the Insurrection Act. My answer is that some Trump vows are more plausible than others. His threat to fire Powell is in earnest. It was Trump who originally nominated Powell in 2017 and believes that his loyalty was betrayed. There are few things worse in Trump’s moral universe than an ungrateful lieutenant. Furthermore, as the Wall Street Journal reported last week, Trump advisers are drawing up plans to abolish the Fed’s independence, or at least to water it down. 

Even if Trump failed in that pursuit — some Republicans would be reluctant to vote for the necessary change in law — the act of trying would have deep repercussions. Much like Nato, which could be destroyed by a run of confidence on Trump’s commitment to its mutual defence clause, the Fed would be badly damaged by the sense that it is fighting for its independence. According to the WSJ, the Fed would have to submit its interest rate decisions to the White House in advance. The only FOMC moves that would get the green light would be cuts. If there is one thing we know about Trump it is that he likes cheap debt. That is his life story. 

Let us assume a best-case scenario — that Trump fails to fire Powell (he has statutory job until 2026), and that he fails to legally water down the Fed’s independence. That would be weak grounds for reassurance. Powell’s replacement would be just a year away and it would inevitably be somebody like Art Laffer, Stephen Moore, or a similar devotee of Trump-style magical thinking. Market anticipation of a new era of monetary incontinence would be inflationary. Investors would thus demand a higher risk premium on US Treasury bonds, which would feed into a higher cost of borrowing for American consumers. Now add in Trump’s plans to slap 10 per cent tariffs on all imports, and considerably higher for some (he has suggested 100 per cent duties on cars, for example), throw in a soupçon of mass deportation that would contract the labour market, a fresh sprig of spendthrift tax cuts, and we are served up with a steaming casserole of inflationary dollar crisis.

Most people would not be remotely scared by the scenario I have just sketched. Or it would come about 20th on their lists of things to worry about. Much like health, however, central bank independence and reserve currency credibility are the kind of blessings you only value when they are gone.

There is of course another best-case scenario, which is that Trump loses in November. I would still very marginally put my money on that outcome. If he wins, however, expect renewed inflation and market turmoil. Claire, as a smart economics reporter you are no doubt rolling your eyes at my data-free speculation. My question is this: what is the maximum number of rate cuts you would expect from the Fed between now and November? And how quickly would even one cut feed into consumer sentiment?

Recommended reading 

• My column this week complains that it is adults, not students, who are America’s real problem. I am loath to sound robotically even-handed but there are lashings of hypocrisy and hysteria on all sides of the political spectrum, and of course in university administrations.

• On the same subject, do read the Weekend FT diary by Columbia University’s Mark Mazower, which provides an excellent, and humane, account of the turmoil on his campus. This was a deserved hit with our readers.

• My colleague Joe Leahy has an interesting Big Read on why Xi Jinping is afraid to unleash the Chinese consumer. Since China’s overcapacity is arguably the biggest current US complaint, his answers are essential reading. The one that most catches my eye is Xi’s aversion to “welfarism”. Britain’s late Norman “on yer bike” Tebbit had more sympathy for the youth unemployed than China’s communist leader.

• Finally Matthias Matthijs and Mark Blyth have an excellent essay in Foreign Affairs on why we shouldn’t bet on a British revival — even if Keir Starmer’s Labour win a powerful majority in the upcoming general election (likely in the autumn). Starmer’s plans are simply too small-c conservative to unleash the investment boom, and resulting productivity lift, that the stagnant UK economy so desperately needs. Well worth your time.

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Claire Jones responds

When the Federal Open Market Committee met in mid-March, most of its members bet they’d cut rates three times this year. Two of those looked set to come ahead of the November elections. 

A lot has changed since. 

March Personal Consumption Expenditures and Consumer Price Index readings have confirmed that disappointing figures for January and February were not some seasonal blip, raising the prospect that US price pressures could prove as hot and sticky as summer in Washington. 

After Wednesday’s FOMC vote, the chances of multiple pre-election rate cuts look about as slim as the possibility of Jay Powell going to a Halloween party dressed as 1970s inflation villain and former Fed chair Arthur Burns. 

Joe Biden will be lucky to get one cut before Americans head to the polls. However, with the right messaging, even that could prove a quick and easy win. 

Biden’s first term in office has been consistently blighted by inflation — lowering borrowing costs would be an opportunity for the White House to declare victory over the worst bout of price pressures for a generation. 

Regardless of the recent disappointing readings, inflation is way down from its peak and the US is still the best performer of any major economy in the world.  

If unemployment remains low, and cuts — however meagre — come, Biden ought to be able to convince at least a few undecided voters that he can be trusted more than Trump to provide stable growth, prices and jobs during his second term.

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And now a word from our Swampians . . .

In response to “America’s crisis of loneliness”:
“While politicians may not be the source of spiritual guidance, they are the ones who can drive policies that create fertile ground for connection. A living wage, access to health care, education, housing, transit — these are all things politicians can and should be focusing on. Instead they focus on either an effort to return to the antebellum south, appeasement of Wall Street and the 0.01 per cent, and whatever it is Democrats are doing that aren’t leading to meaningful uplift and security in peoples lives. The baby boomers yanking up of all the socialist programs they benefitted from and their destruction of the environment hasn’t helped either. Real change is going to come from the younger generations who have gotten a bum deal and have only ever experienced instability and selfishness in their elected officials.” — Stephen Shapero