The Trump Presidency has been anything but predictable. In the last few weeks, we have seen President Trump announce new tariffs on Chinese goods and then backtrack and cancel some through the holidays. Of course, the backtracking came after the stock market reacted in a very negative fashion.
In the last few days, we have seen different statements from the President and some of his economic advisors, and the statements seem to be sending very mixed signals. In a Sunday appearance on Fox, Larry Kudlow stated that, “There’s no recession on the horizon.” The Director of the National Economic Council added that there were no plans for additional fresh measures to boost the economy, and that the Trump administration would stay the course on its current agenda.
Peter Navarro, Director of Trade and Manufacturing Policy, stated on ABC’s This Week said he expects “a strong economy through 2020 and beyond.” He even argued that we actually hadn’t experienced a yield curve inversion it was simply a flattening of the yield curve due to the strong economy.
All of this sounds good, but approximately 24 hours later, President Trump issued a couple of tweets. “Our Economy is very strong, despite the horrendous lack of vision by Jay Powell and the Fed, but the Democrats are trying to ‘will’ the Economy to be bad for purposes of the 2020 Election. Very Selfish! Our dollar is so strong that it is sadly hurting other parts of the world.”
The second tweet is the one that seems to contradict the administrations statements on the strong economy and how a recession isn’t on the horizon.
“The Fed Rate, over a fairly short period of time, should be reduced by at least 100 basis points, with perhaps some quantitative easing as well. If that happened, our Economy would be even better, and the World Economy would be greatly and quickly enhanced–good for everyone!”
While the staff statements are the opinions of the White House, economists disagree. In a recent Associated Press poll, 74% of economists believe the U.S. economy will experience a recession by the end of 2021. Of course, President Trump is worried about a recession possibly disrupting his re-election efforts and that is the main reason he is calling on the Fed to cut rates.
To cut the Fed Funds rate by 100 basis points in a short period would be foolish and reckless in my opinion. Rate cuts are like bullets for the Fed’s gun. With the target rate at 2.25% currently, the Fed only has nine bullets at its disposal. Using four at one time or over a short period while our economy is still growing would be a poor policy decision. It would be like hearing something in the cornfield and firing four shots before we can even see what’s out there. I don’t think we want to do that.
Of course, this could also be a negotiating tactic by President Trump. Right now the Fed hasn’t committed to any more cuts which puts them at 0 basis points in cuts—although futures are priced to indicate a 95% chance of a 25-basis point cut on September 18. By suggesting 100-basis points in cuts, Trump’s goal may be to plant the seed for a 50-basis point cut. This is the equivalent of offering $150,000 on a house that is listed at $200,000. You know the seller isn’t going to accept $150,000, but your real goal is to get it for $175,000. Get them to meet you half way.
One interesting event that will occur later this week is the Jackson Hole Economic Policy Symposium. The event is hosted by the Kansas City Fed and it kicks off on August 22 and lasts for three days. Federal Reserve Chairman Jerome Powell is expected to address the symposium on Friday, August 23. After the meeting and rate cut on July 31, many analysts are looking for some reassurances from Powell. If Powell doesn’t pacify investors with some kind of commitment to more cuts, we could see severe declines in bonds with rates moving higher as a result.
As volatile as the market has been over the last few weeks, we may get a bit of a breather for a few days, but once the Jackson Hole Symposium starts, we could see volatility strike again—be ready.