Submitted by Michael Every of RaboBank
Just like a super-hero uppercut in a comic strip, the Fed Chair leaped to the rescue yesterday. That’s right. The same Fed Chair who less than a year ago was being called the new Tall Paul by some, and who was being sold as the man prepared to ween the US off of its addiction to ultra-easy monetary policy has shown that he is at heart a Small Paul. We are all better off Fed than Red, apparently.
What else is one to make of the Fed’s sudden switch to talk of rate cuts when using the same data the Fed has always said is relies on the economy is in a good place; unemployment remains at a record low; the stock market is still not far shy of an al-time high: housing is ‘pleasantly’ unaffordable in most big cities; and inflation isn’t far from the 2% target? Oh, and when the fiscal deficit is huge and widening into that late cycle growth? And when yield curve inversion has been persistently ignored as the market not seeing what the Fed sees? Nonetheless, in a speech Powell has made clear that he is “closely monitoring” US trade tensions and “as always, we will act as appropriate to sustain the expansion.” I don’t think he means a rate hike – and neither did the markets. Yields rose, and so did equities, while USD fell.
Of course, it’s not even the prospect of a rate cut to fight tariffs--which are supposed to be inflationary aren’t they…or does the Fed only recognise inflation as destroying demand when it happens outside the realms of the neoliberal policy consensus? Do I even have to answer that?--as even more was promised. Powell even opened the door to more QE when he stated “Perhaps it is time to retire the term ‘unconventional’ when referring to tools that were used in the crisis. We know that tools like these are likely to be needed in some form in future ELB [Effective Lower Bound] spells, which we hope will be rare.” Like I said, Small not Tall Paul.
Powell did also note that “Using monetary policy to push sufficiently hard on labour markets to lift inflation could pose risks of destabilizing excesses in financial markets elsewhere”. However, he then seemed short of any recognition that the only alternative policy is deglobalisation and reregulation and/or massive state fiscal intervention. That’s because there is no other way to deal with the structural weakness of labour vs. capital that anyone who has ever read any heterodox economics would have recognised as the root cause of our present problems even before the GFC hit….and those who haven’t apparently never will recognise it. Perhaps one should take the above statement as a policy goal then? Equity markets certainly seemed to think so.
Of course, this also smacks of a weak USD – something we have been arguing against for some time. Yet the world has changed, folks. If (when?) we see the Fed first slash rates and then turn on QE again, the Eurodollar market/emerging markets might breathe a sigh of relief. However, politically there is no longer the will in the US to reflate the rest of the world, even if the Fed is able. We are far more likely to see tariffs to keep all that delicious new liquidity locked up inside the US as much as possible.
After all, US President Trump has just made clear he thinks the tariffs on Mexico will start in less than a week even as Mexico tries to play nice on immigration, while China--where nothing happened yesterday at all; Move along; Nothing to see here--is not backing down on its trade war either. Moreover, very shortly Trump will be meeting EU leaders, including Germany’s Merkel, to celebrate the 75th anniversary of the D-Day landings. As he made clear in a press conference yesterday, there is absolutely no way he will allow the Germans in particular to keep dodging their 2% of GDP defence commitment to NATO. I started with a reference to comics, and the upcoming meeting between Trump and Merkel is likely to look like the Simpsons locker-room scene where Homer whips a towel at the plump German exchange student Üter, who wails “Don’t make me run, I’m full of chocolate!” In short, don’t rule out US-EU tariffs either, making earning those (Euro) Dollars even harder. At least the UK is being offered a “great” trade deal post-Brexit,…provided the NHS is included.
Also, don’t think that the US Democrats won’t think the same if they are in charge and the Fed is merrily heading towards QE again. Presidential nominee contender Elizabeth Warren has just launched her own economic policy platform based around green technology, state investment, and—frankly—quasi-mercantilism. She is, however, openly talking about a weaker USD too. Yet she just won’t ever be able to get it sustainably if she is backing a pro-growth, quasi-mercantilist trade policy that stops USD flowing into a world financial system that is based on them!
It is, after all, no surprise that the same country whose currency we think and trade in is the same one who invented the men and women who wear their underwear on the outside, and who can leap, make, or break markets in a single bound.