The Fed is in a Good Place, not so the Fisc

There they were. The titans of the New York financial community. Come to the New York Economic Club to lunch on a large portion of crow. Many of the diners, themselves arrivistes in the eyes of old-moneyed New Yorkers, have always regarded Donald Trump, an emigrant from Queens to Manhattan, as an über-arriviste, a vulgarian not on their must-have-to-dinner-some-day list, a man of dubious taste and even more dubious finances. And now “I am proud to stand before you as President of the United States.” He had come to tell them of his accomplishments, many of which had made them richer than even they had ever dreamed of being.

And a man whose decisions on trade with China; whether to impose tariffs on cars made in the EU and Korea; which regulations to repeal, which merely to weaken; and much more would determine their incomes and living standards for the near-term and very possibly the longer-term future.

Trump did not disappoint. He both gave both foe and friend what they wanted to hear. His enemies were confirmed in their view that this braggart would claim every improvement in the economy as a personal achievement, and contrast his performance with alleged failures of Barack Obama, among other predecessors.

His supporters heard a list of promises he said had been kept:

  • an economic boom such as the world has never seen before;
  • lowest unemployment rate in 50 years and for blacks, Hispanics and Asians the lowest since records have been kept;
  • the end of factory flight thanks to tax cuts;
  • new respect from nations who know America means what it (he) says;
  • rapid wage growth for the lowest paid;
  • consumers flush with tax refunds and lower prices resulting from the roll-back of regulations.

Early in his list of triumphs, Trump paused for but did not immediately get a round of applause. When it did emerge the president jokingly said, “Thank you. I was waiting for that. I almost didn’t get it.”

The many traders in the audience were hoping they would get a definitive statement on wither trade negotiations with China. Instead, they heard a two-pronged message: negotiations are going well, but we don’t need a deal, the Chinese do. They reneged once on promises made during negotiations, they cheat, “nobody cheated better,” and previous administrations allowed it. But if they try it on him, tariffs on Chinese good will be raised “very substantially”. Looking forward, there will be unrelenting attacks on the Federal Reserve Board’s failure to, get this, drive interest rates into negative territory. “Give me some of that money”, the President demanded, reflecting the grasp of economics that drove several of his enterprises into bankruptcy.

When the applause for negative rates was somewhere between inaudible and perfunctory, an annoyed Trump bared his teeth, “Only smart people are clapping.” Take that, you not-so-smart titans of finance.

Reading between the lines, and adding rumors floating around Washington and medialand, there will not be tariffs on EU vehicles because European exporters will agree to increase their investments and job creation in the U.S.

Also, the election campaign will have a new focus. Here is how the President put it: “I walked into a room, a couple hundred people. Very substantial people. And I said, listen. I don’t have to make a long speech. I don’t like you. You don’t like me. You have no choice but to vote for me… . Because the people we are running against are crazy.” Laughter, applause. Message understood.

The President is on to something. Few presidential candidates win elections. Their opponents lose them. Al Gore, running at a time of peace and prosperity, sure winners in most elections, managed to combine an unpleasant personality and a leftward lurch to throw the election to George W. Bush. Hillary Clinton, whose resume surely topped Trump’s, managed to lose to a flawed property developer by refusing her husband’s advice to campaign in states occupied by what she later called “deplorables”, and could neither compose nor wring from her staff a statement of why she wanted to be President. Make America Great Again might sound corny to the sophisticated, but it trumps a campaign seemingly based on Its My Turn.

Trump did not have the last say in his war with the Fed. On the day following the President’s triumphal return to New York, Fed chairman Jay Powell appeared before a congressional committee and pronounced the level of interest rates to be “on a good place”, appropriate to the state of the economy, and therefore unlikely to change barring substantial new developments. Unsaid: we will have no truck with negative rates.

In contrast to “the good place” in which the Fed has put interest rates is the “unsustainable path” on which the federal government has placed fiscal policy. “I remain concerned about the longer-term effects of high and rising federal debt, which can restrain private investment and, in turn, reduce productivity and overall economic growth.” If a serious slow-down does occur, the government’s trillion dollar deficits will make it risky to ramp up spending to stimulate the economy. Further increases in the red ink pouring across the nation’s ledger might prompt investors to demand higher interest rates to cope with the risk of inflation, exacerbating rather than ameliorating anti-growth pressures.

In short, the Fed has managed the economy just right, making it deserving of at least equal credit for the economy’s robust performance, claimed by the President as exclusively his own 24-hours earlier. The deficit, said Powell, darkens the economic outlook. And, of course, “… uncertainties around trade tensions … continue to weigh on the economic outlook.” The Fed has done what it can. Excessive deficits and trade tensions are matters for, er, the President.