Individual investors are nervous about the stock market and the possibility of recession.
Meanwhile, institutional money from banks and hedge funds is keeping a bid under equities, pushing stock prices higher after every minor dip. Together with the “Plunge Protection Team,” they are keeping the wheels from coming off the stock market cart.
The question is whether that will continue. Or, to be more precise, will we see the monetary stimulus typically expected from the Fed during an economic slowdown, or will central bankers try to torpedo Trump’s re-election campaign as a Fed insider has just proposed?
President Donald Trump is increasingly critical of the Federal Reserve and chairman Jerome Powell for refusing to cut interest rates rapidly enough. He wants to place the blame for any recession and falling stock prices on the central bank and not on the trade war with China.
It remains unclear to what extent the Fed will capitulate to pressure from the President and heed recession warnings from the bond market, where yields remain inverted.
The U.S. economy will be a major issue in the 2020 election, and perhaps the deciding factor.
That is why the President has done an about face on monetary policy. Prior to the 2016 election, Trump lambasted the Fed for intentionally trying to boost Barack Obama and Hillary Clinton and for blowing bubbles in the markets.
Trump installed Jerome Powell as Fed Chair in February 2018. The FOMC continued the cycle of rate hikes that had begun under Janet Yellen. In less than a year, rates increased 4 more times.
The President began criticizing Powell when the stock markets cratered late last year. As the incumbent worried about re-election in 2020, he continues to bash his Fed Chairman and the FOMC for failing to provide stimulus.
Trump wants the Fed to drop rates dramatically and resume Quantitative Easing. Winning reelection isn’t the only concern. The President also wants to win the trade war he is waging against China, something else that will be more difficult if the nation slides into recession.
There are signs the Fed does not intend to play ball with Trump.
Former Fed official William Dudley published an op-ed with Bloomberg last week. He encouraged his peers not to “play along” with the President by providing stimulus to offset the negative effects of the trade war – which he calls a “manufactured disaster-in-the-making.”
Dudley suggests that Trump’s reelection “presents a threat to the U.S. and global economy.”
He did not offer his opinion as to which of the many socialists running against Trump would be less of a threat – or acknowledge that the contenders share Trump’s anger over Chinese trade abuses.
With arrogance typical of central bankers, Dudley thinks Fed policy is beyond reproach from the President.
He wants citizens to keep believing the Fed is run by infallible sages, independent of the fray in Washington DC. Except for the upcoming election where, for the good of all, officials should take sides against Trump.
If current FOMC members agree with Dudley and work to undermine Trump’s campaign, it will be another confirmation this President is up against an adversarial Deep State.
Unless the FOMC plans to surprise markets with their next move, something officials have carefully avoided in recent years, the most likely action at their next meeting is a quarter point cut.
But that small cut may be insufficient to reverse the inverted yield curve, halt recession talk, and quell speculation that the Fed is gunning for President Trump.