Trump’s Five Biggest Moves Yet

Trump’s Five Biggest Moves Yet

The next six months will be the biggest of Trump’s presidency.

He will have to make five decisions that determine the economic future of the global currency system, let alone America’s economy.

Australia’s wealth is driven by exports priced in dollars and on American markets.

The price of iron ore, coal, agricultural commodities and much more depend as much on the fate of the US dollar as their own supply and demand. Not to mention the profitability of our exporting companies’ swing with currencies too.

But what are these decisions Trump will make?

Prolific author Jim Rickards, of our own Strategic Intelligence newsletter, explains the situation below.

In short, there is an enormous personnel change coming up at the world’s most powerful institution.

The majority of control is up for grabs.

And Trump decides who gets nominated to what post…

Trump Owns the Fed

Jim Rickards

Donald Trump has the opportunity to appoint a higher percentage of the Board of Governors of the Federal Reserve System at one time than any president since Woodrow Wilson.

President Wilson signed the Federal Reserve Act during the creation of the Fed in 1913 when it had a vacant board. At that time, the law said the Secretary of the Treasury and the Comptroller of the Currency were automatically on the Fed’s Board of Governors.

But besides that, President Wilson selected all five of the other participating members.

Now Trump has the opportunity to fill more seats on the Fed’s Board of Governors than any president since then.

That’s pretty amazing when you think about it.

To review, the Federal Reserve’s Board of Governors is made up of seven appointees. That means they can make a majority decision with four votes. If you’re reading about the Fed, you might also see reference to ‘regional reserve bank presidents’. These are roles within the Federal Reserve System, but the real power is found on the seven-member Board of Governors.

Here’s the remarkable part:

As of last week, four of the seven Fed board seats are now vacant.

In fact, I’m describing a 72-hour span last week as the most momentous three-day period in the entire history of the Federal Reserve (see below for all the details).

Trump will own the Fed. Meaning, whatever the president wants monetary policy to be, he’ll get.

In other words, Donald Trump will be able to shape the Fed’s majority.

But the tricky part is figuring out how he plans to shape it…

During the campaign season, Trump called China and other nations currency manipulators. That signalled he believed the dollar was too strong and wanted it to weaken. But then the North Korean nuclear crisis rose to the fore.

Trump backed off his threats against China because China has the most economic influence over North Korea, and Trump wanted China to use that leverage to convince the North to back off its nuclear program.

But China didn’t deliver as Trump had hoped, and a trade war with China is now likely. This probably leads many to believe that Trump will appoint a lot of ‘doves’ to the board.

But don’t be surprised if Trump goes with a hard-money board. In fact, that’s what I expect. These will be hard-money, strong-dollar people, contrary to a lot of expectations. Trump advisers include hard-money advocates like Dr Judy Shelton, David Malpass, Steve Moore and Larry Kudlow. I expect Trump to heed their advice.
Which brings us to Janet Yellen…

Janet Yellen’s term as Federal Reserve Chair is up at the end of January — less than five months from now. Whoever President Trump appoints to replace her will be subject to Senate confirmation.

Because that process takes time, that means the president will have to name Yellen’s successor around November or December.

In the meantime, a lot of uncertainty over the Fed’s direction will hover over the market, as if there wasn’t enough uncertainty in the market already.

But one thing is certain: The next Fed head will have a lot on his or her plate.

Who do I believe will replace Janet Yellen as Fed Chairman? And why did last week contain the most momentous 72-hour period in the Fed’s entire 100-year history?

Read on…

The most momentous 72 hours in Fed history

A 72-hour span last week was among the most momentous for the Federal Reserve in the over 100-year history of the US central bank.

Many Fed watchers would be completely baffled by that statement.

Fed watchers are mesmerised by minute changes in grammar and syntax contained in the statements of the Federal Open Market Committee (FOMC), the Fed group that sets interest rates.

At the last FOMC meeting, on 26 July, the Fed did nothing. The Fed’s summer meeting in Jackson Hole, Wyoming came and went at the end of August with scarcely a word said about interest rate policy. The next FOMC meeting is not until 20 September. In short, we’re in the midst of a rare period where nothing seems to be going on at the Fed in terms of rate policy.

How could last week have possibly produced a momentous 72-hour period?

The answer is that institutions boil down to people, not calendars, and Fed people have just made a lot of headline news.

Last Tuesday morning, 5 September, Fed Governor Lael Brainard delivered one of the most significant Fed speeches ever. Translating from Fed-speak to plain English, she more or less admitted the Fed has no idea how inflation works.

Brainard pointed out that the Fed began its current monetary policy tightening cycle in the belief that tight labour markets implied inflation was coming with a lag. The Fed raised rates in December 2015, December 2016, March 2017 and June 2017, in part to get out ahead of this coming inflation.

Instead, the opposite happened.

The Fed’s favourite measure of inflation plunged from 1.9% to 1.4% between January and July 2017, even as job creation continued and the unemployment rate fell. In other words, the relationship between tight labour markets and inflation turned out to be the exact opposite of what the Fed believed. Its models are in ruins.

Of course, this is what I’ve been telling my readers to expect all year. The Fed was tightening into weakness, not strength, and would soon have to flip back to ease in order to avoid an outright US recession. And ‘ease’ is exactly what Brainard called for in her speech. Brainard had a three-part remedy for disinflation…

The first part was the use of forward guidance to signal that Fed rate hikes were on hold indefinitely. This is a form of ease relative to market expectations of further hikes.

The second part was to raise inflationary expectations by making public statements about the forward guidance. This is similar to the ‘Think System’ used by Professor Harold Hill in the musical The Music Man.

Hill is a con artist who sells instruments to school kids. He can’t teach music, but tells the kids if they ‘think’ hard enough, they can play! Brainard says if we all think inflation is coming, it will come. Her odds of success are about the same as Professor Hill’s, who is almost run out of town by an angry mob.

The third part is the most interesting. The Fed has a ‘target’ of 2% inflation, but has implicitly treated the target as a cap. Brainard said, in effect, that if your target is 2% and you’ve been below that for five years, it’s OK to run above 2% so that the long-term average hits the goal.

This means she’s OK with 3% inflation, a sentiment also expressed by Chicago Fed President Charles Evans. Inflation at 3% cuts the value of a dollar in half in 24 years.

Brainard and Evans think the Fed can dial it back if needed, but 3% inflation could just as easily turn into 4% or 5% inflation once expectations really do change.

Then on Wednesday morning, 6 September, Fed Vice Chairman Stanley Fischer unexpectedly announced his resignation effective almost immediately. He said his reasons were personal, and I actually believe that. I met Stan back in my days at Long Term Capital Management; he was thesis adviser to several of my partners there. I wish him well.

But this resignation now means that four of the seven Fed board seats are now vacant.
One nomination by Trump is pending (Randy Quarles), but that still leaves three more nominees to fill the board. And that’s not counting Janet Yellen, whose term as Chair expires at the end of next January. All in, Trump will get to name five out of seven Fed governors in less than one year after being sworn in as president.

I told my readers months ago that ‘Trump owns the Fed’, and that reality is playing out even faster than I expected then.

Finally, last Wednesday afternoon, 6 September, the White House leaked to Axios that Gary Cohn, Trump’s top economic adviser and the former chief operating officer of Goldman Sachs, was out of the running to replace Janet Yellen. This also confirms what I said months ago — that Kevin Warsh is the likely next chair of the Fed.

Warsh has previously served on the board. After being nominated by President George W. Bush, he was a Fed governor, serving from 2006 until he resigned early in 2011.

This is a complete changing of the guard. The old guard — represented by Yellen and Fischer — is leaving. A close associate of the old guard, Lael Brainard, has admitted publicly that the Fed models are broken and that the Fed has no idea what it’s doing.

Kevin Warsh, and a group of new appointees vetted by Warsh, will be the new guard before the end of this year. They are pragmatists, not ideologues like Yellen.

Brainard is right about one thing. Disinflation is a serious problem for a country with a 105% debt-to-GDP ratio. Inflation is needed for the US to have any hope of getting the debt problem under control. This means government theft from savers and negative real rates. Warsh and the pragmatists understand this.

Warsh believes that the Federal Reserve should have raised interest rates a long time ago. But with disinflation a much more pressing concern than inflation right now, being a pragmatist means he won’t commit to tightening if conditions don’t warrant it.

You should expect lower real rates, slower balance sheet normalisation, and higher inflation than markets are now pricing. This will not happen all at once, but in stages over the next year.

The biggest winner will be gold.

The time to enter your gold position, if you don’t already have one, is now.

Regards,

Jim Rickards
for The Daily Reckoning Australia

PUBLISHER’S NOTE: We’re currently working on a new and updated Australian chapter for Jim Rickards’ bestseller, The New Case for Gold. We hope to release it soon. It’s an illuminating read. Inside this new chapter are many insights that you will find especially useful (and hopefully profitable) for you as an Australian. You will learn why Australians are uniquely poised to benefit from gold.

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