Earlier this morning, amid a barrage of tweets praising US trade war strategy, Trump also touched on another key topic that has become especially sensitive to the president: the Fed's monetary policy. Or perhaps China's monetary policy, because in a fusion tweet addressing both, Trump said that "China will be pumping money into their system and probably reducing interest rates, as always, in order to make up for the business they are, and will be, losing. If the Federal Reserve ever did a “match,” it would be game over, we win!"
China will be pumping money into their system and probably reducing interest rates, as always, in order to make up for the business they are, and will be, losing. If the Federal Reserve ever did a “match,” it would be game over, we win! In any event, China wants a deal!— Donald J. Trump (@realDonaldTrump) May 14, 2019
Accurate or not, and one can argue that China's monetary policy traditionally mimicked that of the Fed, with the PBOC raising or lowering rates in lockstep with the US central bank, Trump's tweet made it clear once again that the president is especially eager to see the Fed slash rates.
And, with the Fed once again full of doves, we are confident that they would be just as happy to comply if given the right reason.
Luckily, not everyone on the FOMC has drank the Kool-Aid, and in a speech to the Economic Club of Minnesota, Kansas City Fed President Esther George said she’s opposed to cutting interest rates in order to raise inflation to the central bank’s 2% target, warning that could lead to asset-price bubbles and ultimately an economic downturn.
Slamming an argument made last Friday by the Fed's uber-dove, Neel Kashkari who claimed in a Bloomberg interview that only lower rates for longer can help fix inequality (clearly unaware that it is the Fed's QE and ZIRP policies that are behind the record wealth inequality in the US), George - who luckily is a lone voice at the Fed and votes on monetary policy in 2019 - said that "lower interest rates might fuel asset price bubbles, create financial imbalances, and ultimately a recession."
"In current circumstances, with an unemployment rate well below its projected longer-run level, I see little reason to be concerned about inflation running a bit below its longer-run objective" she added.
While she is absolutely correct that easing monetary policy will only result in an even greater asset bubble, financial markets don't care and as we discussed yesterday, have now fully priced in at least one more rate cut this year.
Previously, Charles Evans, the uberdovish president of the Chicago Fed, said the central bank might want to consider cutting rates if inflation falls to around 1.5%.
George, however, rebutted such concerns, and said that "I am not convinced that a slight undershoot of inflation below objective requires an offsetting overshoot of the objective. The current level of inflation may perplex central bankers and financial market participants, but in the context of a growing economy and job gains, it doesn’t demand a Fed policy response."
George's warning will fall on deaf ears: the Fed is currently considering changes to its policy framework as part of a yearlong review, with Bloomberg noting that ideas to be debated include targeting inflation of 2% over a period of time, with the Fed deliberately allowing price pressures to overshoot the target to make up for periods when inflation has been under 2%.
For now, neither the market nor George look like they will get their way: Fed officials have signaled they don’t expect to raise or cut interest rates this year and have pledged patience before making any adjustment to policy, an approach that George praised.
“This wait-and-see approach is appropriate because we have not seen upward pressures building on inflation, even though we have experienced above trend growth and a further tightening of labor markets,."
That said, while the Kansas City Fed president repeated her forecast for solid growth this year, slowing from a first quarter supported by volatile factors, she acknowledged that global growth and trade remained a risk to her outlook, especially China.
“I see the biggest risks coming from trade policy uncertainty and slower growth abroad, particularly in China, the euro area, and the United Kingdom,’’ she said.
Finally, demonstrating that not every Fed member is a clueless career academic with zero understanding of what is going on in the economy, George said that when she talked to people or business owners they didn’t see low inflation as a problem. One can argue the opposite: that if the Fed were to actually talk to ordinary people, their biggest complaint would be that prices, when stripped of their "hedonic", CPI-basket adjustments, are actually rising far faster than wages.