Does Trump Read the Economy Better than the Fed?

Does Trump Read the Economy Better than the Fed?

One week from today, the Reserve Bank of Australia (RBA) will meet for their October meeting.

The year’s flown so quickly, that I can’t believe it’s their ninth meeting for the year.

What I find more baffling, is that another rate cut is on the table.

I know that sounds odd.

I’ve been vocal for the past three years about how the RBA would cut rates before they raised them again.

Yet, here’s the thing…I didn’t anticipate three rate cuts in five months.

More to the point, if the RBA reduce rates by 0.25% next week, that would give us a cash rate of 0.75%.

Everything I’ve learnt over the past 20 years tells me that rates below 1% are an emergency measure.

Yet, here we have our own central bank lowering rates to emergency levels without an emergency.

It’s kind of like hosing your house down because you heard there was a fire in the area.

Rates are going lower in Australia. And the closer we get to zero, the chance of us ending up with negative rates is no longer economic theory. In fact I wrote about how the Australian Securities Exchange is preparing for negative rates.

The idea of negative rates used to be an idea…except today we are seeing it being embraced by central banks around the world.

Jim and I have been warning that central banks have failed people for some time.

Now, read on for Jim’s take on how Trump understands the US economy better than the Fed.

Perhaps negative rates are coming to a developed economy near you.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia

Does Trump Read the Economy Better than the Fed?

Jim Rickards, Strategist

Jim Rickards

Trump recently tweeted that the Fed should lower interest rates immediately and should consider going to ‘negative’ interest rates.

We’re a long way from negative rates, but Trump has shown an uncanny ability to read the economy better than the Fed.

Trump’s call for negative rates may be a much better indicator of where markets are heading than anything from the Fed’s research department.

The trip to zero won’t happen all at once.

The Fed moves cautiously and slowly.

Assuming the Fed keeps up its tempo of 0.25% rate cuts, it would take eight cuts (and therefore eight FOMC meetings) to reach 0% from the current 2% target rate. The Fed meets eight times per year.

So, assuming one cut at every meeting, it would take at least a year to hit zero.

The central bank may pause in rate cuts at one or more meetings based on economic data, so the entire process could take more than a year.

Rates aren’t going negative…yet

Still rates could hit zero before the presidential election in 2020, which is just over a year away.

Negative rates before the presidential election are unlikely unless the economy tumbles into a recession (also unlikely based on the best available data).

But, if Trump wins a second term (a 67% probability, according to my models), his pressure on the Fed will continue.

I recently attended a closed-door, off-the-record session with two senior Fed officials who indicated that negative rates are being seriously considered, even though no final decisions have been made.

Rates may seem low today, about 1.75% on the US 10-year Treasury note and 2% on the Fed fund’s target rate, but they could go much lower as they already have in Germany, Japan and elsewhere.

That means huge capital gains for investors who buy the notes today.

Trump’s economic forecasts have been highly accurate (better than the Fed’s).

This may be yet another example with upside for investors who take heed.

Too soon to call recession

US recession talk has dominated headlines and TV talking head discussions for the past several weeks.

The reason is obvious. The US Treasury yield curve inverted in the three-month to 10-year segment. Inversion is when shorter maturities have higher yields to maturity than longer maturities.

This inverted curve has been a reliable indicator of recessions in the past.

Parts of the yield curve inverted months ago, but the three-month to 10-year segment is considered the strongest indicator of a coming recession.

Suddenly, pundits and politicians (especially those challenging Trump) were yelling about ‘recession’ night and day.

This was true even for politicos who can’t explain what the yield curve is and who wouldn’t recognise an inversion if it bit them on the ankle. It didn’t matter.

Just yelling ‘recession’ as a way to bash Trump was good enough for their purposes.

There are only two problems with this approach.

The first is that when a yield curve inversion signals recession, it usually does so 18 to 24 months in advance.

This might mean that a recession is coming in early 2021 (after the next presidential election), but it says little or nothing about the odds of a recession in 2019 or 2020.

The second problem is that there is no other confirmatory evidence.

Yes, the yield curve inverted, but other indicators such as housing prices, unemployment, initial claims, service sector output, commodity prices and many more were not signalling recession.

Watch the signals

It’s good to be attentive and the yield curve does warrant watching, but it’s far too soon to be calling for a recession.

Still, Trump’s re-election in 2020 may hinge on that.

Generally speaking, presidents who seek a second term are re-elected unless they have a recession late in their first term.

This happened to Jimmy Carter and George HW Bush. Both lost re-election bids because of recessions on their watch.

Trump knows this and, he is taking steps to fend off a recession should one appear on the horizon.

Trump wants to rely on Fed interest rate cuts to prop up stock markets and postpone any recession.

But, if the Fed does not cooperate or interest rate cuts don’t work, Trump’s toolkit includes massive infrastructure spending, possible tax cuts, and industrial bailouts.

Trump could also reverse course on the trade wars.

All the best,

Jim Rickards Signature

Jim Rickards,
Strategist, The Daily Reckoning Australia