Notes From Underground: Does Fear of Increased Tariffs Trump U.S. Data?

This is not a rhetorical question but a very direct concern about the leverage that President Trump has in dealings with Federal Reserve Chairman Jerome Powell.

After listening to European Central Bank President Mario Draghi’s press conference Thursday and then learning about the White House meeting about the possibility of currency intervention, I am wondering whether the president is using TARIFFS as leverage to satiate his desire for lower U.S. interest rates.

The story coursing through the financial media on Friday was economic adviser Larry Kudlow’s interview on CNBC. Kudlow said the White House has ruled out currency intervention.

The Kudlow interview was forced out because of leaks in certain media about the convening of a White House pow wow about the DOLLAR. Kudlow’s comments were broadcasted ahead of a Politico story titled, “Trump Shut Down Navarro Over Ideas to Devalue U.S. Dollar.” The story said Peter Navarro and other trade HAWKS were pressing for a direct effort to devalue the DOLLAR, while noting:

“It’s unclear how the White House would try to weaken the currency.One possibility is to have Trump and other senior officials talk it down in public statements. The government could also sell dollars and buy other currencies to lower the dollar’s value.”

Kudlow made certain to inform those watching that this idea was off the table. Two weeks ago, Goldman Sachs and Pimco published notes raising concerns about the increased probability for U.S. currency intervention.

However, there was something Kudlow said that I find bothersome: Trump is not afraid to use tariffs for negotiating purposes. Well, if Trump is upping the ante for tariffs in an effort to change trade partner policies, what’s stopping Trump from threatening increased tariffs in an effort to get a LARGER RATE CUT FROM THE FOMC?

The FED and the ECB’s Draghi have consistently noted the threat that increased tariffs have on the global economy. The latest FOMC minutes cited the threat of tariffs as a critical uncertainty for the U.S. and global economy. In Draghi’s press conference he said while the European service sector was sound, manufacturing was getting worse, for citing three reasons: a hard Brexit; China slowing; and trade frictions increasing as tariffs impacted capex spending across the globe. The rebound in the European economy projected by the ECB is now put on hold. The bottom line is that Trump holds the tariff threat as a critical lever for his constant bashing of the FED for lower rates.

Kudlow also mentioned Trump is perturbed by France’s threat of imposing taxes on large U.S. tech companies on their European revenues. The DOLLAR ISSUE is still much alive, especially if the FED fails to heed Trump’s demands for lower rates. Is the FED efforts at an insurance policy against potential economic softening really an insurance policy against the trade restrictions of the Trump White House? If this discussion has credibility then the FED OUGHT to cut 50 basis points, heading off potential President Trump imposing increased tariffs.

The most immediate impact would be the DOLLAR weakening with the YIELD CURVES steepening: Two things that the FED has been concerned about since the January pivot. Is it a mere coincidence that the Lighthizer/Mnuchin team is meeting in Shanghai just as the FOMC decision is being released? Are we really DATA dependent or more concerned about the impact from political decisions? This is the predicament confronting the FOMC and investors.

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12 Responses to “Notes From Underground: Does Fear of Increased Tariffs Trump U.S. Data?”

  1. Rohr (Alan Rohrbach) (@MacroMeister) Says:

    Hi Yra-
    Very interesting perspective. It still seems a long way around to use tariffs to weaken the global economy in a way that might backlash into the US (even if current tariffs are starting to bite) in order to influence the Fed. And how much can the Fed actually move on anticipation rather than the data and very near term expectations?
    Then again, that presumes the President actually understands how these things work. After all, he seems to believe ‘we’ are getting rich from his current tariffs.
    If that is just political posturing, so be it. Yet the idea he really believes it is terrifying.
    Best-
    Rohr

    • yraharris Says:

      Rohr—I believe we underestimate what he thinks and the sense he doesn’t see things beyond the immediate tweet.The public spanking of Professor Navarro is a Machiavellian move –ostensibly throw him to the wolves while keeping him available to be the bad boy –remember he has put the idea of countervailing tariffs in to hands of the Commerce Department to correct any diagnosed currency manipulation—-then others need to explain what took place last week with John Williams and Richard Clarida

  2. asherz Says:

    The 2020 elections are the number one factor in influencing White House economic policy, be it the dollar, trade or interest rates. IMO Trump can lose the election against a radical left trending Democratic Party in only one way. A sharp economic slowdown and a market crash.

    The 2.1% GDP Q2 growth was achieved primarily through government and consumer spending, both paid for by borrowings. China talks may yield some success because companies are moving their manufacturing facilities to other low cost producers, such as Vietnam, Cambodia and Mexico never to return. Tariffs on China are a main reason for this. Its slowing economy with some major banks in trouble is pressing Xi more than he would like and may lead to the return of the concessions previously agreed to and then abandoned. A trade deal here would do a lot to give a fillip to the contracting global GDP.

    Interest rates will continue to fall and the QE button is there when needed. Can a recession or worse be avoided before November 2020? All decisions at 1600 PA Ave. are geared to achieving that end.

    • yraharris Says:

      Asherz—certainly this is the thinking of the Trump political team and I have no reason to disagree as the Democrats have certainly not brought forward anyone who is electable as of yet—and yes the GDP data was only that strong because of demand brought forward.Thanks for a high quality post devoid of politics by all measures

  3. Trader1 Says:

    Yra,

    You have any thoughts on what Draghi might do in September that he talked about in his press conference?

    • yraharris Says:

      Trader1—I have thoughts but it is far early in the season to forecast what this perverter of markets will do –what will trump do and if the economic situation in Europe worsens I have to believe the front and center policy will be asset purchases of corporate bonds and equities—he is so badly wanting to mimic the BOJ and SNB as he views the SNB as the great success story of central bank alchemy

  4. Rohr (Alan Rohrbach) (@MacroMeister) Says:

    Good points… maybe a lot of it is political posturing and he does have a better sense than I suspect on the policy side.

  5. Rob Syp Says:

    Last week Yra busted me for the gold etf’s link well I’m back to the drawing board we are living in changing times ladies and gents. If our resident gold person Mike Temple would please comment.

    Just glad I own the physical.

    https://www.cnbc.com/video/2019/07/29/glint-ceo-cozens-a-gold-standard-for-your-wallet.html

  6. ShockedToFindGambling Says:

    Yra…..Good analysis.

    I hope the FED realizes that the yield curve (2s/10s) always steepens just prior to a recession.

    The yield curve can flatten/invert for many years, prior to a recession.

    However, a big move of steepening, means the recession is close.

    https://fred.stlouisfed.org/series/T10Y2YM

    Click on the MAX button, which shows recession.

    • yraharris Says:

      Shocked –very informative post.Thanks for the St. Louis Fed research–and when the market smells Fed capitulation to market signals yes the steepening commences—see 2007 for proof —well done

  7. Chicken Says:

    Yellen agrees the FED should cut? Yeah, okay…. Zzzzzzzz, Pbbhhh…

    So…. for the past 8 years or so, let’s see…. While the narrative has been for higher rates. the inverse occurred. When the narrative predicts lower rates… Surprise, surprise the opposite.

    The FED has shed quite a few MBS, surely that shows up somewhere?

    Meat Grinder, extra gristle. Securities are sold, not bought.

    • yraharris Says:

      Chicken–pathetic that Yellen had to pipe up–why can’t you just go and leave the job to your successor.You were part of the group,Vice Chair in -fact—-that cowered in the face of the taper tantrum which made Powell’s job that much more difficult

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