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Trump sounds off

By David Morrison  |  28/11/2018 15:46
”Fed

President Trump lashes out at May’s Brexit plan, China, General Motors and Fed Chairman Jerome Powell

President Trump is really hitting the headlines with his comments and tweets. Over the weekend he undermined UK Prime Minister Theresa May’s Brexit plan, saying that it looked like a great deal for the European Union. Then he took aim at China telling the Wall Street Journal it was “highly unlikely” that he would hold back from raising tariffs on $200 billion of Chinese goods in the New Year. This came just days ahead of this week’s G20 meetings in Argentina. A dinner is planned between Mr Trump and China’s President Xi Jinping where trade and tariffs will be the only substantial thing on the menu. Trump added that if there was a failure to reach a deal he would also put tariffs on $267 billion of Chinese imports that are currently not subject to duties.

GM job losses

The US President’s next target was General Motors (GM). On Monday, GM CEO Mary Barra announced a massive restructuring, which will involve closing five US factories, cutting six car models and the loss of 15,000 jobs. Trump blasted GM and Ms Barra for closing plants in the US, but not China or Mexico. He went on to tweet: “If GM doesn't want to keep their jobs in the United States, they should pay back the $11.2 billion bailout that was funded by the American taxpayer.”

Powell back in Trump’s sights

But arguably Mr Trump’s most controversial musings concerned US Federal Reserve Chairman Jerome Powell. The President told the Washington Post that he wasn't "even a little bit happy" with his appointment of Powell as Fed Chairman, adding that he thought the central bank's recent actions were "way off-base". The comments came less than a day before the Fed Chairman delivers a keynote speech at the Economic Club of New York. This evening Jerome Powell will talk about the Fed's framework for monitoring financial stability. Investors will be looking for any signs that the Fed is preparing to slow down its forecast rate of monetary tightening next year. Like Mr Trump, many analysts feel that the Federal Reserve under Mr Powell is hiking rates and cutting its balance sheet too aggressively, given where we are in the economic cycle. Others blame Mr Powell’s predecessors for waiting too long before taking the first tentative steps to raise the fed funds rate.

Political interference

Yesterday, Federal Reserve Vice Chairman Richard Clarida delivered what was widely interpreted as a hawkish speech. Consequently, it would be unusual if Mr Powell came straight out and contradicted the comments and thoughts of his colleague. Not only that, but the US central bank takes its independence very seriously. It would certainly be controversial if Chairman Powell suddenly turned dovish now as he would risk being accused of bowing to political pressure. The trouble is, of course, that Trump’s criticism has now made it extremely difficult for Mr Powell and his colleagues at the Fed to pivot dovish, even if conditions suggest they should. Meanwhile, it appears that Treasury Secretary Steven Mnuchin has been on manoeuvres. According to Bloomberg sources, Mr Mnuchin asked members of the Treasury Borrowing Advisory Committee whether they preferred a shift from hiking rates to balance sheet reduction.

What Clarida didn’t mention

As noted yesterday, it will be interesting to hear if Mr Powell expresses concerns about the slowdown in global growth. Mr Clarida didn’t, and that surprised a few people. After all, the World Trade Organisation (WTO) has just followed the IMF and downgraded its outlook for global trade. On top of this, several analysts have pointed to the 30% drop in the price of crude as a major indication that global economic growth is slowing. But if Mr Powell indicates that the Federal Reserve is still on course to raise rates in December and 2019 as well, then the dollar looks likely to continue to strengthen. On the other hand, if he suggests the Fed may pause in tightening then the dollar should weaken and equity markets may respond positively initially. But if Powell cites slowing global growth as the reason behind his dovish pivot, such a move could reverse quickly as corporate earnings come under further pressure.
 
 
 
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