The Upcoming Fight Between Trump and the Fed
All the while Trump has been in office there have been at least two things his team could look on with happiness and perhaps some pride.
One has been the runup in the stock market, with the Dow Jones Industrial Average having risen from a low of just over 19,750 in January to peaking over 21,000 just a short time ago in early March.
The second is the Monthly Jobs Report and the related Unemployment Report. The latest of these items came out on March 10, 2017. As reported then, 235,000 new private sector jobs were created in the U.S. economy in February. The related unemployment rate also dropped, by 10 basis points to 4.7%.
President Trump can probably credit his own administration, in spite of it not having passed a single piece of legislation yet, with the euphoria surrounding the rise in the stock market average. The reason is the stock market itself rises to a significant extent as companies – and their shareholders – bet on what the future will hold. So a future with more federal capital investments, eased “doing business” restrictions (like higher allowed emissions, for example), and significantly more money spent on defense items, must seem like one of the biggest paydays in years the U.S. government could possibly deliver to its constituents.
The jobs report is a little more suspect, since there is very little Trump could have done to directly impact those created jobs after only having taken office on January 20. But like with the factory decisions and investments Trump has taken credit for as part of his self-anointed toughness in keeping jobs within the U.S. and bringing new foreign investments here, even when the truth is he also had little to do with those decisions either, he has wasted little time suggesting the optimism of the American economy is behind a lot of that new hiring. And who could possibly be behind that optimism if it really isn’t Donald Trump?
Where all this is going to get a little complicated for the newly-elected President lays in what all this growth, both real (in terms of new jobs) and assumed (in the form of the stock market rise) means for the sustainability of that growth.
The reason is that the Federal Reserve Board, with its chairwoman Janet L. Yellen already having telegraphed her expected moves for some time, sees the continued uptick in business growth as a red flag that needs to be reined in a bit. Like a horse gathering speed as the sun begins to set, letting business just continue to grow indefinitely at a high pace can have highly negative consequences in the long run.
If bank lending rates – interest rates – continue to stay at the same rate they are now, the economy will likely continue to zoom forward and perhaps even do so at an even faster rate soon. If so, the laws of supply and demand will potentially drive prices upward in that economy, with inflation soon becoming tangible enough so everyone will be affected by it. Capital goods like cars and appliances, housing and rental costs, and the price of energy may move upward too fast.
Inflation begets inflation, then, because as goods that are critically needed to keep that economy growing go up in price, other companies will need to raise their prices to help pay for those rising prices. Incomes also will go up, but because the price of everything else is also rising, income numbers going up does not necessarily mean any real net new buying power for anyone.
In time, supply will eventually exceed demand as prices rise too high to justify buying at those levels. And at those levels the economy will become unsustainable and may begin to collapse on itself, perhaps also at a rapid rate.
Some have argued that increased housing prices and even the stock market growth in itself represent ‘bubbles’ that will eventually burst. The resulting drop could be just a minor shock, a course correction with a relatively easy path back on the upwards track again. Or it could be a bigger shock, with investors and businesses reacting not just by waiting to invest again, but instead pulling their money out of future investments and the stock market at a more rapid rate than expected.
In the end that could trigger a more rapid collapse than the U.S. economy could handle easily. It could trigger major layoffs across the country as people lose confidence in the economy. Those who still have jobs then pull back from new major purchases also.
For the Fed, then, the logical move is to raise the bank prime lending interest rates. A small increase will make it a little less desirable to borrow money to fuel future growth (or to buy that new home or fancy car on credit), so it would cause a slight slowing in the economic growth rates. A bigger increase right now would be a little riskier to the economy and is unlikely.
The challenge right now is that the economy is currently growing faster than most had expected. And for Trump, even though he might think differently right now until he has analyzed it further, that is exactly the wrong thing for his reputation as the master of “the Art of the Deal” to drive growth for the U.S.
With the current rapid growth, Fed chairwoman Yellen has little choice but to raise interest rates very soon and pull back on that rapidly-moving horse that is the U.S. economy. But with interest rates higher, President Trump will argue – and he will be right – that this means “his” economic growth plans may have to be curtailed in the face of higher business borrowing rates in the U.S.
As his first year in office continues, further interest rate increases are likely later on, too. Which is going to cause many businesses faced with the need to borrow to scream for help. And President Trump is going to want to give them help, either in direct form of not having the interest rates go up or by offering other tax breaks and grants to give businesses the equivalent fiscal injections to keep them going.
All of which puts the Fed’s actions to attempt to keep the economy from doing what is known as ‘overheating’ in direct conflict with what President Trump is going to want to happen.
It is not just about policy, either. It is about two radically different approaches to managing an economic engine.
For Trump, it’s about making a guess for what he wants to do, borrow to make it happen (because that’s what he has always done), and then later figure out how to bail things out if they are not on track. That is the way he has run his many businesses.
And it is also how even the current successor plan to the Affordable Care Act (also known as “Obamacare”) is being rammed through government review and passage: there is no budgeting analysis yet that shows how much it will cost either the government or the taxpayers who will shoulder its ultimate burden.
In the parlance that new business ventures once relied on – some three decades ago -- as the right way to grow, Trump’s approach is all about “Ready, Fire, Aim”, in that order. It is about “going with your gut” and then figuring out what to do later.
In the Fed’s case, it is about carefully-researched economic modeling and a probabilistic numbers-oriented analysis to the economy. That may be too coldly analytical to cover all the positive things that a given rapid growth situation might allow for. But it also has a higher likelihood of keeping the economy from roaring completely out of control.
The Fed also operates as an agency of the Federal Government with some significant degree of independence from either the Legislative Branch (Congress) or the Executive Branch. What this means for Trump is that he cannot just order the Fed to do much of anything. These are appointed individuals put in place with the ability to stand up to an overeager Congress or White House.
So when Trump gets mad because the Fed has made a decision he disagrees with, he actually is in trouble on two counts. He cannot directly impact the decision and he also risks creating sufficient worry in the public (because of that conflict) that he may actually do damage to the public perception of what is really going to happen to the economy.
If there is a question of this, just imagine for yourself what President Trump might tweet publicly when he hears Chairwoman Yellen raised interest rates a little too much. He could say that it will “destroy the economy” or label it as “really bad”. And for Trump, those words could have the worst possible effect if people actually believe he was right, because they would get scared.
Personal and business confidence could then be affected faster than normal, driving prices down more rapidly. If the trend were to continue, layoffs would happen not long after and the economy could be driven way down.
On the other hand, for a man with all that major business experience that Trump has, maybe he himself would not be all that worried about any of that. Because after all, he has proven to have somehow always managed to dig his way out of some of the biggest business messes of his own business career.
In his case, however, he solved those problems by filing for bankruptcy. Many times. Then discharging his past debts to creditors for pennies on the dollar and just moving forward again.
And bankruptcy is just not an option the entire country can use to bail itself out, if the same poor management team that led all those past Trump companies into bankruptcy does the same thing to the United States.
Buckle your seat belts, America. Because the next several months of tussle between President Trump and Fed Chairwoman Yellen are going to a very interesting ride to experience.