President Trump and the Federal Reserve -- The Question to Ask Is "What Inflation?"

HALLOWEEN. Ghoulies and Ghosties and Long-legged Beasties and Things That Go Bump in the Night. Well -- that seems to be a perfect introduction to the current Federal Reserve Board. It certainly is Going Bump in the Night. • • • POWELL HAPPY RAISING RATES. That's what President Trump said last week, and every wannabe expert in central bank finance came out of the chutes at him. Money and Markets wrote last week : "President Donald Trump, like most presidents before him, is no fan of the Federal Reserve and its raising of interest rates. The only difference between Trump and past presidents is he lets his criticisms fly while they kept their issues out of the headlines, for the most part, because the Fed is supposed to operate free of political influence. Much has been made about Trump’s Fed bashing, and he turned it up on a notch Tuesday in The Wall Street Journal, saying Fed Chair Jerome Powell -- who Trump himself appointed -- is threatening US economic growth and that Powell 'almost looks like he’s happy raising interest rates.' " • The Wall Street Journal quoted the President : “ 'Every time we do something great, he raises the interest rates.' The WSJ said the President declined to elaborate, and a spokeswoman for the Fed declined to comment. Mr. Trump said it was 'too early to say, but maybe' he regrets nominating Mr. Powell." • The FACT is that the Fed has raised its benchmark interest rate three times this year and all signs point to another hike in December, as well as three more next year. Fed Chairman Powell has said the Fed will raise rates to a so-called “neutral level” that won’t hinder economic growth while also keeping inflation in check. BUT, Money and MArkets wrote : "The President’s caustic comments about Mr. Powell came as Mr. Trump repeatedly described the economy in personal terms. He referred to economic gains during his time in office as 'my numbers,' saying, 'I have a hot economy going.' He described his push for growth as a competition with former President Obama’s record, saying that increases under his Democratic predecessor were skewed because of low-interest rates. Trump also touched on the ongoing trade war and tariffs disputes, which Senate Majority Leader Mitch McConnell asked him to fix as soon as possible before they endanger the economy further. But when asked what he thinks is the biggest threat to the economy his answer was, of course, 'the Fed. To me the Fed is the biggest risk, because I think interest rates are being raised too quickly...' Asked why he thought Mr. Powell was raising rates, Mr. Trump paused, then said, 'He was supposed to be a low-interest-rate guy. It’s turned out that he’s not.' Trump did not say whether he was considering the removal of Powell yet -- if he even has the legal authority to do so. 'I don’t know...I’m just saying this : I’m very unhappy with the Fed because Obama had zero interest rates.' ” • The Fed ultimately answers to Congress, not the President, and the leaders on Capitol Hill have been giving Powell high marks. Represnetative Jeb Hensarling, a Texas Republican and chairman of the House Financial Services Committee, said in an interview last week : "I am generally impressed with Chairman Powell’s leadership.” Hensarling said the Fed’s current interest-rate “trajectory seems to be headed in a good direction.” • When President Trump complained that the Fed had "gone crazy" by tightening its monetary policy, his statement prompted International Monetary Fund Managing Director Christine Lagarde and others to come forward in defense of Powell and the Federal Reserve's decision-making. Lagarde said : "I would not associate Jay Powell with craziness. No, no, he comes across, and members of his board, as extremely serious, solid and certainly keen to base their decisions on actual information, and decide to communicate that properly." The inference in Lagarde's remark is that President Trump is not acting on "actual information" or communicating it "properly." YET, it is President Trump who has jump-started the US economy nwhich is the only economy in the world operating on a growth path right now. The IMF under Lagarde has not even been able get Europe up and running away from its counter-productive "austerity" battles with Greece, and now Italy. • Powell has said neither he nor other Fed officials are letting Trump's frequent complaints affect them : "My focus is essentially on controlling the uncontrollable. We control what do," Powell said in a question-and-answer session with anti- Trump Judy Woodruff of PBS this month. As the central bank of the United States, the Federal Reserve's mission is to set interest rates with the twin goals of maximizing employment and fighting inflation. The Fed is traditionally granted independence from presidential influence so that it can fulfill that so-called "dual mandate" without political interference. That said, President Trump is correct when he points out that the Fed has raised interest rates three times this year as the US economy has heated up, and it is widely expected to hike again in December. President Trump told the WSJ last Tuesday : "How the hell do you compete with that? And Obama -- remember this, it's very important -- Obama had zero interest." • • • IS THE FEDERAL RESERVE POLITICAL??? AGAIN, the President has a point. While Obama took office after the Great Recession began in December 2007 and the Federal Reserve at that time put historically low interest rates in place, and took other measures besides, in an effort to inject money into the faltering economy -- the truth is that later on in the Obama presidency, economists began asking when the Federal Reserve was going to stop using Quantitative Easing and begin cutting back from its multi-trillion dollar gift of "cheap money" to banks by providing them with funds at zero interest rates. That QE policy endured for the entire Obama presidency and added trillions of dollars to the US debt while keeping the US Dollar at low foreign exchange levels, allowing Obama to borrow funds from foreign entities, China especially, and pay back the interest on those huge loans with cheap Dollars. So, the Fed gave Obama a pass, and Trump is right to ask why he is being treated so harshly in what has to be called the very early stages of his effort to rebuild the US economy. • CNBC published an article on October 18 that argued that the Fed will ultimately push the US into recession, if it follows through on its stated intent to raise rates 3.5% by 2020. President Trump has described the Fed's possible interest rate path as the biggest threat to the US recovery. Rabobank says the Fed could over-hike and push the US into recession. • CNBC noted that the summary of the September 25-26 Federal Open Market Committee (FOMC) session pointed to a continued willingness by the US central bank to gradually increase interest rates. CNBC wrote : "The Fed's indication that it will continue raising rates comes in the face of ongoing criticism from President Donald Trump. Earlier this month, Trump said the Fed is going "loco," openly criticized Fed Chairman Jerome Powell, and asserted that higher rates are the single biggest threat to the economic recovery." • Lyn Graham-Taylor, senior fixed income strategist at Rabobank, told CNBC's Street Signs on Thursday that Trump may have a point : "We think the Fed will ultimately push the US into recession by following this path," the analyst said. The federal funds rate, which helps to dictate borrowing costs across the US economy, was raised to operate between 2 and 2.25% on September 26. Policymakers see one more rate hike this year, 3 more increases in 2019 and 1 more in 2020. Graham-Taylor said he expects a US recession within the "next couple of years" and that researchers at his bank were taking cues from a flattening of the yield curve. • CNBC explained : "A flat yield curve occurs when the yield (return) on longer dated debt reduces to levels nearer that of shorter-dated bonds. It can be indicative of a lack of confidence in the medium to long-term of an economy. In recent weeks, the yield curve has actually steepened but Graham-Taylor said, in this instance that was related to uncertainty, rather than investor confidence in the future. The analyst said the Fed would probably 'overhike' with just two more rate rises and that would be enough to trigger an economic downturn. • • • TIGHT MONEY AND INFLATION. The Fed is not only treating President Trump much more harshly than it treated Obama, the Fed is also pushing the US toward recession. The problem many economists see is that the Fed is pursuing an 'imaginary' inflation that is non-existent. The real problem is deflation. Japan has suffered in its grip for three decades, and President Trump is pumping the US economy to prevent such a deflationary stagflation spiral of low growth and collapsing prices. • American Thinker's James Soriano wrote on Saturday : "Policymakers at the Federal Reserve are expected to raise short-term interest rates again in December, which would be the seventh such increase since President Trump took office, and they may ratchet them higher three more times in 2019. The number of critics of the Fed’s tightening are few, but one of them is President Trump himself, who has chastised Federal Reserve Chairman Jerome Powell, his own appointee, for the fast pace of interest rate increases. Speaking about the Fed chairman, Trump told the Wall Street Journal on October 23 that “it almost looks like he’s happy raising interest rates.” The image is one of a 19th century banker twirling his mustache as he snaps his lash over the heads of cowering debtors. The President is right to be concerned. Excessive Fed hawkishness right now is a serious danger to the economy. Over the past year the move toward higher interest rates has been justified on grounds that a robust economy gives the Fed a window for returning short-term interest rates to a 'normal' range, after a decade of keeping them near zero because of the 2007-08 Financial Crisis. Getting back to normal may be a laudable policy goal, if, as economists say, all other things being equal." But, says Soriano, all other things are not equal : "The Trump tax cut changed the macro-economic context. The Tax Cut and Jobs Act of 2017 reduced the corporate tax rate to 22% from 35%. This is an important change because the lower tax rate encourages the creation of new productive capacity, which in turn increases the demand for dollars to fund it. The Fed should accommodate this demand by injecting liquidity into the system. Instead it is doing the opposite. Raising short-term interest rates has the effect of stifling the demand for dollars." Soriano sees several features on the political and economic scene beginning to emerge from all this : (1) The Federal Reserve is staking out a position where it has veto power over tax policy. Now the Fed governors may not have that intention, and they may say their decision-making is guided by the public good; nonetheless raising interest rates at the present time has the net effect of depriving the Trump tax cut of traction. The Fed has the upper hand here because higher interest rates are more powerful than lower tax rates. That’s because lower tax rates are merely permissive on expansion -- they can only create an enabling -- whereas higher interest rates are compulsive on contraction -- they stop the activity of marginal producers who could be in business if borrowing costs were lower. In short, if the Fed continues on its present course, it can trump Trump. (2) Monetary nullification of the Trump tax cuts will demoralize the public, which will become more wary of future efforts to lower taxes. The Administration has promised that the 2017 tax cut will get the economy out of its long-term slow-growth rut [i.e., stagflation]. If the economy has insufficient liquidity to fuel expansion, it could easily revert back into a pattern of slow growth. The Left will then complain that the tax cuts benefited only the rich and that cutting taxes is the root cause of the federal deficit. 'Experts aren’t sold' is a typical headline doubting the efficacy of the Trump tax cut. Those experts could be right. The corporate tax cut will not have its optimal effect if the Fed puts American businesses on a budget of stingy liquidity." (3) Traditionally, Democrats tend to be more dovish on interest rates than Republicans, who tend to be enamored of something called the 'strong dollar.' What’s missing from the current policy battle is the sound of Republican artillery laying down supporting fires for President against the Fed. If Democrats gain control of the House of Representatives in this year’s election, we may see the President making common cause with them for a looser monetary policy. This in turn may set a pattern for future Trump-Democrat collaboration on immigration reform and the southern border, with Republicans in a secondary role. (4) The nightmare scenario is Japan. The Japanese economy over the past thirty years is a case study of the long-term effects of deflationary monetary policy. It is a cautionary tale one hopes the Fed governors know well. It is not known if the shoguns who run the Bank of Japan ever looked 'happy raising interest rates,' but fair to say they take pride in having kept inflation at bay. The cost has been terrible : Japan has endured two generations of lost economy opportunity. It’s still stunning to realize that the widely watched Nikkei Stock Average is some 45% below its historic high reached in December 1989!" • For Soriano, the economic battle lines are drawn : "Today the Fed says higher and the President says lower. Both sides should sit down and work out an objective standard for setting interest rates. Ideally, the way forward would be a move toward monetary reform : the Federal Reserve should discard its short-term interest tool in favor of direct open-market operations to inject or drain liquidity into or out of the economy; commodity prices, especially gold, should guide decisions on Fed interventions; and the world should re-establish a regime of fixed exchange rates." • On Monday, Money and Markets published an article by former congressman and libertarian leader Ron Paul, who agrees with President Trump, saying : “He is right that ‘crazy’ is a good way to describe the Federal Reserve.” Paul has been a frequent critic of the Fed over the years, so his assessment comes as no surprise. Paul wrote a book, “End the Fed,” in 2009, and it debuted at No. 6 on the New York Time’s best-seller list. Ron Paul states that when central banks create money, those who first get the new money enjoy an increase in purchasing power before the new money causes a real increase in prices. Those who receive the money first are members of the banking and financial elite. By the time the new money reaches the middle class and working class, inflation has set in, so any gain in purchasing power is more than offset by the increase in inflation. Thus, central banking causes income inequality. Since its creation in 1913, Paul argues, the Fed has caused the US Dollar to lose most of its value, punishing savers and rewarding those who pile up massive debt. Paul says : "It is amazing how many economists who oppose price controls on all other goods support allowing a secretive central bank to control the price of money. Trusting the Federal Reserve to produce permanent prosperity instead of a boom-and-bust cycle is a textbook example of a popular definition of insanity being repeating the same action in hope of getting different results. The Federal Reserve System is as unworkable and doomed to failure as every other form of central planning. It is likely that the next Fed-created recession will come sooner rather than later....The only way to avoid crisis is to force Congress to end our monetary madness. The first steps are passing the Audit the Fed bill, allowing people to use alternative currencies, and exempting all transactions in precious metals and cryptocurrencies from capital gains taxes and other taxes." • WHY ARE THE MARKETS IN SUCH FLUX? Money and Markets' JT Crowe wrote on Monday : "The Dow has lost 8% of its value since its all-time high on October 3. The Nasdaq has been pushed into correction territory for the first time since February. The S&P 500 is now down on the year, wiping out hard-fought gains over the past 10 months. So why the sudden volatility, especially when the economy is still doing so well?" Crowe points out several possible answers : The 2017 mega profits caused complacency to set in, but the 2017 jump-start has come to a natural conclusion and the markets are back to their normal jumping around. The market selloff has taken on a life of its own and selling is begetting more selling, but so far we haven’t seen a capitulation moment. The Volatility Index, or fear gauge, closed at 24.16 after inching all the way up to 27.52. The measurement gained about 21% during the week with a massive jump on Wednesday. The VIX tends to fall when stocks rise, and vice versa, because it measures how much traders will pay for protective options on the S&P 500 in the coming 30 days. A reading of 25 is well above the index’s normal average of around 20 and above its average this year. Moreover, the VIX has climbed 100% so far in October alone. That means investors have been steadily paying for protection from a coming market downturn. • But, the MarketWatch list of reasons for worry all point to the fact that investors are concerned about slowing growth here and abroad and the impact of tariff clashes between the US and China, which may be exacerbating Beijing’s economic malaise. BUT, economic data shows no sign of a pending recession, and recessions are what kill bull markets. We are in a correction in a long-term bull market, driven more by uncertainty over China and trade, than rising rates. • • • ASK LARRY KUDLOW. Newsmax did just that last week. And, White House economic advisor Larry Kudlow says that Wall Street is plunging because of fear Democrats will win midterms and end President Donald Trump’s “pro-growth policies.” Kudlow, who served as the Trump campaign's senior economic advisor, sees a much more political angle to the selloff : "I think the stock market is worried that Congress will change and will overturn these pro-growth policies," the veteran financial guru and former Ronald Reagan advisor said. • Larry Kudlow is right about the economic growth generated under President Trump. CNBC reported last week that the number of Americans receiving unemployment benefits fell to more than a 45-year low, pointing to tightening labor market conditions. Initial claims for state unemployment benefits increased 5,000 to 215,000 for the week ended Oct. 20, the Labor Department said on Thursday, adding that claims for South and North Carolina continued to be affected by Hurricane Florence. Claims for Florida and Georgia were impacted by Hurricane Michael. The four-week moving average of initial claims, considered a better measure of labor market trends as it irons out week-to-week volatility, was unchanged at 211,750 last week. The labor market is viewed as being near or at full employment, with the unemployment rate close to a 49-year low of 3.7%. AND, there are a record 7.14 million open jobs in the economy, suggesting a shortage of skilled workers. That was confirmed by the Federal Reserve's Beige Book published on Wednesday. According to the Fed, "employers throughout the country continued to report tight labor markets and difficulties finding qualified workers." Tightening labor market conditions and a robust economy are expected to keep the Fed on course to increase interest rates again in December. The Longer term implications of constantly rising interest rates seem to be unimportant to the Fed. • CNBC also reported last week that US durable goods orders edged up a modest 0.8% in September. The Commerce Department says demand for durable goods edged up a slight 0.8% in September, a sharp slowdown from a 4.6% jump in August. The swing was heavily influenced by the volatile aircraft category, which fell 17.5% in September after having surged 63.7% August. The recent weakness in "investment" orders has raised concerns about whether a growing trade war with China and stock market volatility were making businesses more cautious. • • • DEAR READERS, we will know soon if Larry Kudlow is right about why the markets are down and bouncing around. The mid-term elections come a week from today. We will have to wait for later in November when President Trump and Chinese President Xi will meet on the sidelines of the G-20 summit in Buenos Aires, Argentina. And, we may get some further explanations from Fed Chairman Jerome Powell, who is scheduled to testify about the Fed’s outlook for the economy before the Joint Economic Committee on December 5. Powell and his Fed colleagues have been under pressure from the White House and Wall Street over hikes in interest rates to stave off inflation, and Powell will surely be asked for some explanations. • Chasing inflation is one thing, but pushing the US into recession in order ot fight the current non-existent inflation is a lot like chasing windmills for no other reason than that it is 'always' what the Fed has done. Who cares about the future of America or the world? Not these fellows.