We wrote yesterday that the “biggest threat to the dollar is not the stock market pullback. It’s Trump’s response to it.” Three days in to the stock market pullback, it appears the markets are brushing off Trump’s remarks, including yesterday’s stupid comment that he knows more than the Fed. This is in keeping with the old adage “don’t fight the Fed,” and while Trump has probably never heard the phrase and doesn’t know what it means, the rest of us do. It means the Fed is Boy Scout-resolute in its mission to be the trusted marshall of the economy. Presidents may fight openly with the Fed, if rarely—Nixon and LBJ both quarreled in public with their Fed chiefs—but only a minority at the time ever thought the Fed would cave.
Bond guru El-Erian said yesterday to get rid of the idea of a “Powell put.” It’s a different Fed now, one that has no wiggle room. “The Fed put, as people like to call it, is way out of the money now.” MarketWatch reports he said “the Fed would be reluctant to change course given solid prospects for the U.S. economy for the next two years thanks to strong business investment, rising household income and supportive fiscal policy.”
Besides, let’s not forget that comment only two weeks ago about the Fed possibly feeling the need to go past the “neutral” rate in this tightening cycle. To back down now would be to lose face and possibly drive a tiny wedge into the Fed’s independence. Trump’s comments can only stiffen Fed spines. This is not to say the Fed would not back off if the stock market keeps falling and fails to stage a recovery in the next few days or week, as we all expect. We could see some backtracking on the December hike if the S&P just keeps going and makes the 20% mark signaling a bear market. But it would be a confidence issue, not a Trump bullying issue.
One thing that worries us is economic advisor Kudlow on TV yesterday reassuring the world that Trump knows perfectly well the Fed is independent and he is just letting off steam with no intent whatever to change the chairman or the Board. Larry likes the limelight a little too much, but has the grace to know it. We worry he went out to reassure markets not because it was needed—the markets were ignoring Trump, as proved by none of them recovering—but because he himself has a niggling fear that Trump might do something intemperate while Larry’s back is turned.
We got a complaint from a Reader saying Trump cannot fire Fed chairman Powell. This has been debated ever since we imagined he might fire Yellen upon taking office. We are relying on a sane and reasonable article in Forbes that says this:
“The Federal Reserve Act doesn’t explicitly give the U.S. president power to fire the Fed board members. But section 10 has a mysterious little phrase indicating it’s at least possible.
“…thereafter each member shall hold office for a term of fourteen years from the expiration of the term of his predecessor, unless sooner removed for cause by the President.”
“…The Act doesn’t define what the word ‘cause’ would entail. But Congress clearly thought the U.S. president should be able to remove board members before their terms expire, under certain conditions.
“This legislative time bomb has been lurking in there for decades. Now we have a president who loves exercising unilateral power in ways his predecessors did not.
- He’s used the pardon power several times without the normal review process.
He fired the FBI director to try and stop a criminal investigation.
He imposed import tariffs on imaginary “national security” grounds.
Trump doesn’t mind breaking precedent to achieve his goals.”
Here’s a kick in the teeth: “Would Congress object? Probably, but its members have yet to impose any meaningful constraints on Trump. All he has to do is dream up some “cause” and most will fall in line.”
Bottom line, the danger is not over. It may be postponed until next time, assuming the stock market recovers this time as we expect.
Looking ahead, we get very little to inspire FX action. We get the import/export prices and the University of Michigan consumer confidence index, with the inflation expectations component. But having just gotten the CPI, we may not much care. We also have two Fed speakers (who will be sure to keep their traps shut about the Fed’s independence). Behind the scenes, so to speak, the big factor for the euro is Italy. PM Salvini said you can count on the yield spread not reaching 4% and indeed today it has dipped a little more. See the chart. And yet Salvini is defiant and not a little insulting to the EU, saying he will do the "exact opposite" of what Brussels demands, referring to budget prescriptions from Brussels expected after the budget is presented next week. Varoufakis (remember him?) says Italy is pushing the EU toward disintegration.
A lot of this is operatic posturing, but we think Salvini is being truthful when he says “The prescriptions imposed by Europe - and by the Governments of Monti, Letta, Renzi and Gentiloni - have increased the public debt and made Italy poor and precarious. We will do the exact opposite of that.” Before there is an “excessive deficit procedure” against Italy, we expect some 11th hour talks to avert it. This is more likely to influence the euro than anything going on in Washington.
Bottom line—the dollar is likely coming back. Position squaring could be extreme today.
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