Does Trump Want A Dovish Fed Chairperson?

The biggest news in the financial world on Wednesday was the President’s interview with the Wall Street Journal which I briefly touched on in my last article. Trump mentioned that the dollar is too strong for American exports to compete. This sent the dollar lower. A weak dollar would help exports, multinationals’ profits, and tourism. Many retailers in the destination cities of New York and Miami felt the effects of the strong dollar. A weaker dollar would also boost commodity prices which would help energy and materials firms. I would adjust my estimate for 2017 S&P 500 earnings higher if the dollar fell. Supporting a weak dollar is a position Trump has had consistently. However, it would be interesting to see how this worked with the boarder adjusted tax. The boarder adjusted tax was supposed to boost the dollar. At this point that policy is far from certain. I may be being overzealous to bother mentioning it as it may face the same rebuttal from Congress that Paul Ryan’s healthcare plan received.

The second point made by President Trump was that America won’t be labeling China as a currency manipulator. A report on the topic will reveal that China hasn’t manipulated its currency for months and doesn’t want to do so because it effects talks with North Korea. It’s quite ironic to see Trump’s comments manipulate the dollar index and then see the administration discuss whether China is manipulating its currency. All the developed countries manipulate their currencies. It’s called the global currency war for a reason. Countries consider how their fiscal policy and monetary policy will affect their currency when making decisions. The reason Germany entered the European Union is because it cheapens its currency which helps its exports. Germany is even willing to pay for bail outs to countries such as Greece to keep the European Union together.

Whether the Trump administration is being hypocritical is irrelevant to markets. This decision is good news for the global economy as it means China and America won’t be entering a trade war. A few months ago, I made the claim that Trump wouldn’t start trade wars as it would hurt the economy. Political rhetoric matters little when it comes to governing. Neither China nor America want a trade war which makes it unlikely to happen. In fact, during the campaign, Trump said his discussions of tariffs were empty threats to get countries to make better deals with America. As I mentioned in the previous article, in the meeting with Chinese President Xi Jinping Trump got China to expand its beef and financial services industries to American firms to compete in the country.

The final point President Trump made to the Wall Street Journal was that the he respects Janet Yellen. He said he hasn’t decided who will be the next Fed chairperson next year because it’s too early. This is exactly the opposite position candidate Trump took as he criticized Yellen’s low interest rate policy for creating bubbles in the economy. Low interest rates are causing bubbles in the economy and always have. Low interest rates fueled the housing bubble in the early 2000s and its fueling the current equity bubble (on a price to sales basis, the S&P 500 is the most expensive ever). In the interview with the Wall Street Journal, Trump said he likes low interest rates. When Trump was a candidate, originally, he said he liked low interest rates. Then he changed to criticizing low interest rates, saying he only said he liked low interest rates because it helped him as a real estate investor. Now he’s supportive of them again because he’s part of the establishment. If interest rates rose, it would hurt the economy, which would hurt his approval rating,

The ten-year bond yield rallied after Trump’s interview was reported on as yields fell to 2.2232%. Looking at the chart, the ten-year bond yield made a lower high in March as it remains in its multi-decade channel lower. Some bond investors thought the bottom in yields last summer was the lowest point they would ever get to, but they may not have considered a sub 1% Q1 GDP growth rate along with a president who is talking down rates. In my 2017 predictions article, I said the ten-year bond yield could fall below 2%. It certainly looks like it’s going down that path now.

In terms of who Trump will pick as Fed chair, it doesn’t matter who the person is; it matters what policies that person supports. I think he won’t select Yellen, but he’ll select another dove. Trump’s decision to go with a dove despite members of the GOP leaning towards a rules based approach to monetary policy, which means raising interest rates quickly, will cause him problems when it comes time for the Senate to confirm his appointment. Currently, this news of Trump praising Yellen should be bullish for stocks, but if the Senate doesn’t confirm Trump’s dovish appointment for the Fed chairperson next year, it will cause uncertainty with monetary policy which will cause stocks to fall. The Congress’ decision on how it deals with the debt ceiling in the fall will give us a preview of how it will approach Trump’s Fed chair appointment.

The final news item coming from the White house is that Trump is close to picking the next vice chairperson to Federal Reserve and filling a community banker position. I expect Trump to pick a Fed vice chair who is against banking regulations. The person should have similar views to John Allison. It would be inconsistent for Trump to pick someone who is for deregulation of the banks like Allison along with a dovish Fed chair because being against regulation would imply being against an interventionist monetary policy. Regardless of whether this policy is ideologically consistent, the latest reports from the White House is that it is in favor of a dovish Fed and against regulation, so this may end up being the result. Congressional GOP members are far more likely to support deregulation than they are to support ultra-low interest rates which are below the Taylor Rule.

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