One of the arguments, along with its calculations, have been what many perceive as the inevitable clash broiling on the horizon with the now president Trump and Federal Reserve Chair Janet Yellen.
The president has made no-bones about his feelings when it comes to the Fed, and Fed policy during his campaign. While simultaneously it leaves little to one’s imagination that Ms. Yellen (along with most, if not all at the Fed.) probably harbors the same of the now president. The only thing left to argue now is: When does the first clash happen? And will it be (to use Fed-speak) A one and done? Or, A gradual inflation of transitory insults?
This too becomes data dependent, so we’ll just have to wait and see,
Presidents clashing with The Fed. or its members is nothing new. There are even stories of physical intimidation. (e.g., president Lyndon B. Johnson employing his then coined “The Treatment”) And yes, even back further when Andrew Jackson via executive order shut down the Second Bank of the U.S in 1833, yesterday’s precursor of today’s Federal Reserve.
However, with that said, this moment in history is surely setting up to be like no other, with possible repercussions impacting generations to come. Because, at the center of it all, to paraphrase former Fed. president Richard Fisher: “Is a diminutive woman playing Atlas.”
People today worry that Ms. Yellen might “shrug” upsetting the now taken-for-granted monetary order. It’s quite possible (maybe even more towards probable) the now president walks over – and gives the whole thing a “shove.”
I’m figuring the odds to such are more likely than not. And if I’m correct, Ms. Yellen will not remain. I believe she’ll resign before her term expires next year. Here’s my reasoning…
It’s no longer business-as-usual for one’s political survival. It’s now business for business’ survival – political decorum be damned. The latter now front and center to anyone caring to actually pay attention.
Agreeing or disagreeing that it should or shouldn’t be that way is for navel-gazers. It is, what it is – is the only premise one should weigh for calculations going forward. To do otherwise, in my opinion, is a fool’s errand. I’ll use just one example that happened on day one of his taking office:
All references to “Climate Change” and a few others were wiped clean, as in deleted, from the official White House website within moments of being sworn in. If that doesn’t give one any understanding of just how committed, as well as willing, to take off-the-gloves when it comes to demonstrating one means business? You’re not paying attention. Regardless if you agree with the action or not. The demonstrable, unabashed act screams volumes.
Too so forthrightly, and publicly display such an action, with near immediacy, to what can only be perceived as today’s most coveted political “holy of holies” is breathtakingly brazen. It also sets the stage of just how well other “sacred cows” might fare under this new administration, let alone what it has signaled to all the other nations or political leaders that were salivating at just how burdened or shacked U.S. companies were about to be via all the proposed new regulations.
With such an audacious act right-out-of-the-gate, I’m more than expecting monetary policy, and in particular, The Federal Reserve and its current stance or viewpoints to meet similar in-kind. i.e., If the administration is not afraid of making its viewpoints unambiguously clear on those topics? Wait till The Fed. and its Chair become the next focal point. Are you seeing the implications here?
Now here’s a scenario I haven’t seen put forth anywhere else, but is one I can see as far more plausible via my perspective and acumen than anyone now thinks (let alone believes) even possible. To wit:
The U.S., China, and Russia propose to agree (albeit behind closed doors at first) to some form of trilateral monetary cooperative agreement based upon a premise, as too not allow (i.e., harsh public discouragement and condemnation via the “bully pulpit”) The Fed. from raising interest rates.
In exchange for this China, and Russia would agree to publicly make changes to existing trade policies and announce further cooperation in some form of “New Global Trade Deal” which, in reality, just might be good for all concerned. The reasoning? There just might be no other alternative but war.
I’m not trying to be hyperbolic. Things are that precariously poised. They are, and have been, for quite some time standing in full view to anyone willing to pay attention. All one needs to do is look at what happens in China, and Russia every time the Fed. has hiked. China alone might not be able to withstand socially, let alone financially one more rate hike this year. Never-mind the idea of 3 presumed and the implication of possibly more. Russia isn’t that far behind if it has to deal with the same.
So why does Ms. Yellen face such a quandary today more than ever before?
It is not unreasonable to make the argument (an argument I believe will be made forcefully and publicly) that any proposed hike that comes to fruition will be met with the political verbal assault that The Fed., and in particular, Ms. Yellen is either: A:) Hiking purely for political reasons. i.e., Wants the current administration to fail. Or B:) Hasn’t any idea what they (The FOMC committee) are doing, and are just winging-it based purely on anti-capitilstic theories that not only don’t work in the real world. But rather, are detrimental to it. e.g., The entire Keynesian theory.
What will be used as the defense for such calls? Easy: Her own words and prior stances (i.e., Fed. reasoning via her own testimonies) over the last few years, and even those as current as last week at Stanford University. Here’s just an example, to wit:
“The FOMC, for reasons that I have discussed, does not base its decisions on the prescriptions of any specific policy rule. Nevertheless, the three benchmarks I have described–the Taylor rule, the balanced-approach rule, and the change rule, appropriately calibrated–have historically provided useful guidance about appropriate adjustments in the general direction of monetary policy over time. This guidance is illustrated by figure 9, which compares the path of the federal funds rate since 2000 with the prescriptions of the three rules, based on the actual rates of inflation and unemployment observed at each point in time, along with contemporaneous Blue Chip projections of the longer-run unemployment rate and R*.”
It sounds great to a room of academics, but to a business person the next question that races to the front of mind is, “Then why was the Fed. hellbent on raising rates into the ever-growing teeth of the financial crisis only to reverse when it appeared by all accounts it only reversed when the outcry came via the televised literal screaming, and pounding of the table by one James Cramer of CNBC™? You know – if the view was – that the Fed knew what it was doing in the first place. Transcrips showed – they knew anything but.
Both myself and others have argued the Fed. missed its window to raise rates years ago. I have stated more times than not, that every day the Fed. held its grip to the zero bound, along with employing ever the more iterations of one QE program or another once the markets rose 1 point above the previous high before the financial crisis took place (e.g. DJIA™ 14,000 respectively) that the “painting itself into the corner” had begun.
What’s made matters worse is that The Fed. has given reasoning, after reasoning, upon reasoning why it could not move. All of it in the face of higher “market” prices, and ever improving Unemployment numbers. (I know, I laugh too, but the metrics are supposedly what we’re told represent their “touchstones.”)
Every time a metric that was once seen (and actually stated by the Fed. itself) as a useful gauge or barometer as to imply Fed. policy adjustments (remember when 6% became 5%, now a 4 handle is seen as not good enough) was moved more times to ensure inaction over action. It appeared the Fed. was acting more like the famous cartoon scene where Lucy implies, yet never allows Charlie Brown to actually kick the football.
It appeared to anyone trying to makes heads-or-tails of the Fed. that it simply liked to play “kick-the-can” all by itself while the global economy could only sit back in spectator fashion. For the U.S. saver, and small business in particular – they’ve been poor Charlie.
So with the above for context here’s the glaring issue: Now The Fed. has signaled it will forthrightly raise rates.
This will be into what can only be described as a further deteriorating retail economy, continuing sluggish GDP projections, an onslaught of what appears to be ever-increasing bond sell off globally, and on, and on. Combined with: A raising of the burden to U.S. taxpayers via ever-increasing carrying cost associated $10,000,000,000,000.00 respectively (that’s $10 TRILLION) new debt created by the prior administration, and allowed to take place almost solely via current Fed. policies (i.e., The Fed. monetizing or enabling much of that debt via differing proxies or programs)
Again: And now it’s going to raise? Based on a what will surely be a worsening of data points? (i.e., Watch for the a complete reversal by the main stream media reporting such as the 95 million unemployed whom for years were all but invisible to suddenly be front and center, along with every other once glossed over, or made to seem better than it actually implied data point like GDP under 3% will now be seen as “How can something like this keep happening!”)
I’m of the opinion it’s quite possible (However improbable the idea sounds at first blush) China’s leaders propose a meeting (or send covert messages) with the new administration, with the following proposal: Hypothetical to be sure, but it’s also quite plausible…
(This would be coming from the Chinese perspective): “If the U.S., and the president in-particular, decide to label and forcefully make the case on the global stage accusing China of manipulating its currency? We will show you just how much we have been working against that currently – and – will no longer defend its current level, letting it free fall into whatever panicked market forces that may develop. All while simultaneously dumping as much, if not all U.S. debt (e.g., Treasuries) currently held.
And not only will we vociferously blame all of the resulting damage on the U.S. and in-particular “a new administration we’ll argue hadn’t a clue about global monetary infrastructure.” They’ll be an ever-growing chorus and outrage enveloping the globe joining our view within days.
One only needs to only look back to August of 2015 for clues of just how fast things can escalate, and this would make that look like a cakewalk. And what is most important to remember about all the above: Being a communist nation – we’re well accepting, and well equipped to handle what ever political or social uprisings that may occur as a result of this. Are you?”
China might already be in this position already, and just waiting for what it deems as “the right moment.” The possibility of “a deal” in the very near future might be the only thing that avoids it. Remember, even the opening salvo for the possibility of such a deal couldn’t be launched until after the inauguration. Now, China has to also think about Taiwan, Japan, South Sea, let alone trade in ways it never has. Will they deal at all? It’s an open question. Let alone, will Russia?
Ponder the above for a few minutes on its own. Think it’s not possible? Or better yet, probable given what you know today?
It is quite possible that some form of new Brenton Woods (I’m just using the analogy as a coming together and agreement, what it would entail I haven’t the foggiest) where China, Russia, U.S., and possibly even other members agree based on future monetary policy that new and improved trade deals could be hammered out.
However, if The Fed. is hellbent on raising rates as implied at the last FOMC meeting? That same meeting could still be held, the only difference, it’s behind closed doors and the above cautionary scenario I laid out is the only discussion proposed.
I am of the opinion all the above players are quite aware of this. And sitting directly in opposition to any possible resolution that may come about is: The current Chair of the Federal Reserve.
I personally don’t believe she’ll stand, let alone continue to sit, at the Federal Reserve if the new administration feels the Fed. is working against them or their policies. Especially if they’re seen as “the” impediment to making more favorable trade deals.
The barrage of verbal attacks on both the institution, as well as its Chair using the Fed’s own previous words, stances, and implementations as the reasoning will not only tarnish the Fed. in the eyes of the public, but most assuredly just might be the push that Ms. Yellen, as well as others can’t foresee, let alone, are prepared for this year. The Fed. itself is now staring into a “it’s different this time” moment in history.
I believe 2017 will definitely go into the history books with more “never before seen in history” chapters than anyone thought possible. Especially for those in academia, Ivory Towers, and most assuredly – The Federal Reserve.
© 2017 Mark St.Cyr