Which is scarier: US Fed raising interest rates, or Donald Trump ratcheting up his trade war?
- With the Dow giving up its 2018 gains, the stock market is fizzling as proof that Trump’s policies are winners
- Tame inflation in the US supports the Fed’s current rate policies, which continue the pattern set by the previous Fed chairman
Asia could be excused for feeling a bit “fed up” with Donald Trump’s antics - literally.
The US leader is engaged in an unprecedented tit-for-tat with the Federal Reserve over interest rate hikes. The Fed isn’t just any central bank. It is the keeper of the dollar and Treasury securities that are the core of the global financial system and a key pillar of Asia’s economic model. And now its credibility is potential roadkill, as Trump seeks to flip two different narratives.
One is to dodge the blame for Wall Street’s volatility. The stock market gains that Trump touts ad nauseum as proof that his economic policies are winners, are fizzling. The Dow Jones Industrial Average has now effectively given up its 2018 gains. The other: to pull attention away from the bull market in Trump scandals.
The former issue requires copious cognitive dissonance. With economic growth north of 4 per cent and unemployment south of that level, Fed borrowing costs are arguably too low. One can argue tame inflation supports the Fed’s current target of keeping rates at between 2 per cent and 2.25 per cent. Yet recent jumps in 10-year Treasury yields to seven-year highs suggest that inflation expectations are bubbling up.
Jerome Powell, Trump’s hand-picked Fed chairman, has been anything but “crazy,” as the president calls him.
Since grabbing the monetary reins in February, Powell’s team has tightened modestly twice, continuing a pattern that his predecessor Janet Yellen started in 2015.
What is nutty, though, is Trump attacking the one American institution that still tends to inspire confidence abroad.
In truth, stocks are stumbling because investors sense Trump’s US$1.5 trillion tax cut was a dud. America’s household wages are largely walking in place, while corporations are hoarding the spoils that Republicans thought would be a boon for investment in cutting-edge industries. As the sugar high wears off and reality trumps trickle-down fantasies, punters are reducing their stock exposure.
The second narrative may indeed deflect attention from Trump scandals from Russia to Saudi Arabia, to bomb scares aimed at former presidents. But at what cost in the long run?
After slamming the Congress, the judiciary, law enforcement and the media, Trump’s Fed assault may seem the obvious next step.
It comes, though, as former Fed Chairman Paul Volcker makes the rounds hawking a new book, titled Keeping At It: The Quest for Sound Money and Good Government. In it, Volcker recounts his controversial 1979-1987 stint, back when he locked horns with Ronald Reagan. Advisers to the then president pressured Volcker to throttle back on tightening.
“I was stunned,” he writes. Not as stunned as Asian central banks might be, if short-sellers turn on the dollar en masse.
Those odds are growing as Trump adds monetary meddling to fiscal irresponsibility and general erraticness. Trump after all, is slamming his Fed publicly, viscerally and, well, stupidly.
Asia’s economic managers have reason to fear massive paper losses on Treasury debt holding. Exposure is considerable: China at US$1.2 trillion, Japan at US$1.03 trillion, Hong Kong at US$193 billion, Taiwan at US$163 billion and India at US$141 billion.
The real transmission mechanisms, though, are exports and market chaos. For all the region’s heavy lifting since crises in 1997 and 2008, it’s still too reliant on selling goods overseas, not enough on domestic services. Hence the rising level of panic over Trump’s escalating trade war - and his threats to weaken the US dollar.
Market contagion risks already abound, if plunging currencies from India to Indonesia to the Philippines are any guide.
Rising US borrowing costs don’t help, of course. But the Fed ratcheting up rates is far less frightening than Trump ratcheting up his brawl with the globe’s most powerful monetary power.
Fed up, indeed.
William Pesek is a Tokyo-based journalist and author. He has written for Bloomberg and Barron’s