The Fed is supposed to make policy for the sake of the US economy

Outlook:

Today Fed chief Powell speaks about the economic outlook at the Council on Foreign Relations and we have four other regional Feds speaking. Everyone will be watching for any response to Trump's attack on the Fed yesterday, but honestly, there is nothing any of these Feds can say to defend against Trump's lack of civility. It's not the Fed that is the "stubborn child," it's Fat Donnie. Parallels with Turkey's Erdogan (or any other tinpot dictator in an emerging market country) can't be ignored. Loss of confidence in the central bank in these countries, with the appropriate economic and financial data (like ballooning sovereign debt) tend to result in currency devaluation. Trump is trying to convert the US into an EM.

You have to wonder if Powell's venue is relevant here—the Council on Foreign Relations. Powell can't say much about the dollar, which supposedly belongs to the Treasury, but the effect of foreign relationships is certainly an interest rate and dollar factor. The Fed is supposed to make policy for the sake of the US economy, not the world, and yet Powell's mention of uncertainties arising from the trade war and resulting global slowdown are new. The only other time we have had a Fed chief speak about other economies was Greenspan's conundrum—the effect of "excessive savings" abroad interfering with the longer end of the yield curve. Comments by Bernanke were only along the same path.

What we would like to see is Powell connecting the dots from the Trump trade war to the need for a preemptive cut to keep the expansion going because without a cut, Trump is tanking the US economy. That would be bold but it would also to engage with the biggest bully. We also get comments from Williams, Bostic, Barkin and Bullard. Bullard could be the most interesting. He would have hiked last week.

We never like to attribute a plan or hidden motive to Trump, but he might be agitating for a non-scheduled Fed meeting to cut ahead of the calendar. This would be damaging to the Fed's reputation and the market would not appreciate it, either. An emergency meeting is definitely not called for in the absence of an emergency. We do get the new PCE inflation reading on Friday and the jobs report the following week, but it's well-nigh impossible to craft an emergency out of these. Never mind—Trump likes to disrupt and to violate norms, and we have not heard the last of his insults to the Fed.

Today we get new home sales and consumer confidence, both likely to be positive, with tomorrow's durable goods report of more concern. The series has been choppy for the past year. Durables fell 2.1% m/m in April, led by transportation. That is a sector affected by the trade war and can hardly be expected to improve this time. Powell even mentioned it at the last FOMC press conference. Then with PCE on Friday expected to show another drop, Trump has some ammunition to call for a Fed meeting outside the schedule. Assuming the Fed declines, does Trump fire or demote Powell? The probability is not zero.

Analysts are divided on whether the dollar rout can grow legs or is just an aberration. On the basics, the fall in the US 10-year yield is pretty bad but the fall in the Bund is worse. The IFO report and the ZEW report before it both say the German economy is falling into the slough of despond, whereas sentiment in the US, at least from the all-important consumer, is not.

We complained a little about Powell justifying a rate cut as a measure to extend the existing expansion, but in the context of an okay economy, it's not really a bad excuse. What does Draghi have? Nothing comparable. Fresh stimulus in Europe would be to serve as a weak barrier to falling off the cliff.

Bottom line, the drop in the dollar is attributed to the interest rate cut outlook and "should" be temporary. A weak dollar doesn't mean risk-on—see the Swiss franc and yen. Traders had been loaded to the gills with dollars, so a retreat is only to be expected. But it should be short-lived. We had expected the dollar to start rising again as early as Sunday evening and yesterday, with a classic Tuesday pullback today. If this scenario fails to develop, we need to consider whether Trump is succeeding in converting the US into one of those tinpot dictatorships with a devaluing currency.

This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

To get a free trial, please write to [email protected] and you will be added to the mailing list..