A Trump Fed?

The new announcement that the FBI is re-opening its investigation into Hillary Clinton’s emails has moved the polls in Trump’s favor, creating a type of "Trump Fed", with many having him trailing in the low single digits nationally. This puts the possibility of Trump winning the election back onto the table if we assume they are accurate. Investing is about avoiding biases in order to make the best financial decision for your portfolio, so I’ll do my best to review what this movement in the polls means in terms of monetary policy.

I have been tracking Trump’s monetary policy from the beginning of his campaign. In the beginning of the primary race, Trump criticized the Federal Reserve, but said low interest rates were good for him as a businessman. This is a confusing statement because the fact that low interest rates is good for the real estate market is obvious as well as irrelevant given Trump is running for President of America, not a real estate business.

The next update on Trump’s monetary policy came at the end of the Republican primary. He attacked Ted Cruz for not attending the audit the Fed vote. It was an interesting attack because Ted Cruz does favor the measure. Essentially the tactic questions Cruz’s trustworthiness. It’s tough to say where the criticism from Donald Trump came from. It could have been a political move or a genuine interest in reining in the Fed.

The final update we have on Trump’s monetary policy is his interview with CNBC in September. This was a no holds bars attack on the Federal Reserve. He qualified his positive statements about low interest rates by saying he was speaking in terms of being a businessman. He claimed the Fed is acting as a political arm of the Obama administration in order to maintain the bubble economy and stock market. He says when interest rates naturally increase because of market forces the bubble in the economy will pop. These positions are exactly right as much as Yellen and other officials want to deny them.

While recognizing the problem is important, it would be great to know what Trump would do to solve it. It would help to know who Trump will favor as the next Fed chairperson if Yellen steps down if Trump wins. Given the harsh criticisms lobbed at her, I think we have a very high level of certainty she will step down if he wins. This transition will be nothing like the transition between Bernanke and Yellen because the philosophy will change with regards to what the role of the Federal Reserve is.

It is obvious that this change will be dramatic in terms of current policy, but the level of change skyrockets when you look at the potential future changes. The market is anticipating a Fed that may be buying stocks and corporate bonds during the next recession. Put into other words, the market is anticipating the Fed to be the most dovish it has ever been. Anything less than this will cause stocks to sell off and panic to possibly ensue.

So as I said, we do not know what Trump’s plans for future monetary policy will be. I checked his website and there is no mention of the Federal Reserve other than saying the Fed lowered its long term growth estimates. The question posed to Trump should be “if low interest rates are causing the bubble are you in favor of raising interest rates or are you mad at the political aspect of the Fed?” It would have been great if either candidate was asked this, but it hasn’t happened.

However, while there is no statement as to what policies Trump would support, I think we can get an idea from Carl Icahn since he is Trump’s close friend and supporter. Carl is also critical of the Fed creating a bubble economy. He may be the reason Trump has been so critical of the Fed. It seems as though Carl Icahn believes the Fed is an economic crutch which is being used too much. He is in favor of policies which will grow the economy so that the Fed doesn’t need to be weighed on so heavily.

Simplifying the tax code, lowing taxes, eliminating some burdensome regulations, and cutting spending will help boost economic growth. Leaning less on the Federal Reserve and having it be apolitical sounds like it would be moving in the direction of Paul Volcker. The obvious question I have is whether Trump will actually do these things because once he is in power he will want to promote the economy as doing well. He will get a window of a year or two to blame the problems on the last administration, but if we are still in a recession by the end of his first term, there will be motivation to juice the economy with low rates and fiscal stimulus.


            Speaking about the end of Trump’s first term gets fuzzy because the amount of unknowns increase. Looking at the market for the end of the year, there may be high volatility as rumors fly over who Trump will favor as Fed chair. The market could become a large version of what Twitter stock has done this year. It has rallied on rumors of a buyout and then sold off when they don’t occur. This volatility is caused by the Fed enacting highly dovish policies. They are going to unwind at some point in the future, but few are willing to recognize the fact that a Trump election can unwind them by the end of the year.

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  • David

    November 1, 2016

    I guess I will die before we get anyone who comes close to advocating for REAL money versus fiat currency (worthless paper.)

    • John Galt

      November 2, 2016

      Not necessarily. I think the system cannot last that long.