The Federal Reserve and the importance of talking about avoiding a Trump effect

Robert Armstrong and Aiden Reiter
In central banking, boredom can be a recipe for success, and by that measure yesterday’s Fed policy announcement and press conference was a success.

After announcing a quarter of a percentage point cut from the interest rate, Council Chairman Jay Powell did not mention anything new about his vision for the economy with his colleagues still limited, and they are still feeling their way to towards the Neutral level, which they will not know until they get there.

With no substantial market response yet, we have to say: Well done, everyone. It was natural for reporters to press Powell about Donald’s re-election. Trump, who has previously made jokes and made unpleasant comments. and against the Federal Reserve, meaning In the past, especially in terms of banking policy. And here he went at times that were not so painful to slip in spite of everything.

One of those times was the only one-word answer during Powell’s tenure (as far as we can remember) Would Powell resign before the end of his term if Trump asked him to? “No”. Let’s move quickly to the next question, and then there was a short speech of five words.

Does the president have the power to fire you or other Féid leaders? “This is not allowed by law.” finish me

In addition, Powell emphasized that Fed policymakers will not take into account possible policy changes under the new Trump administration until these policies are implemented: “We are not guessing, no we do not consider, we do not accept. ” While our motto here is: “We measure, we speculate, and we accept.”

When Powell was asked about the recent rise in long-term interest rates, whether those high borrowing costs were a threat to growth, as he said when they were around the same level a year ago.

And when inflation was still high. This question was a quick one, as there is a consensus in the markets that the rise in 10-year Treasury bond yields is due to “Trump inflation”.

The argument here is that the next president’s policies on taxes, immigration and tariffs would lead to more inflation, thus requiring tighter monetary policy and higher deficits, which would require higher compensation to support the economy. -to attract investors to buy long-term government bonds. .

So the question was about Trump without clearly referring to Trump, and this is part of Powell’s response: It’s too early to say where long-term interest rates will land, but I will say that the trends seem to be fundamentally unrelated to rising inflation. expectations.

It’s really about feeling like there’s more potential to get stronger, and maybe less prone to injury, and that’s what it’s all about. As you know, we take your financial situation into account. If it is consistent and if it is fundamental, we will certainly take it into account in our policy. But I would say no, we are not facing this situation now.

In this respect, Powell is absolutely right: when we look at the rise in 10-year Treasury yields since they ended at the end of September, we find that most of the increase due to real interest rates, represented here by yield on protection. Financial securities. Also, about 40 percent of the increase is due to the higher inflation rate on balance.

The fact that most of the increase is driven by higher real yields does not mean that it is primarily related to growth expectations Higher real yields may reflect growth expectations, which pulls money away from safe assets and towards riskier assets.

But it could mean that investors will demand more compensation for higher interest rate fluctuations in the future, which is exactly what investors might do if they see a situation US finances are becoming more dangerous.

Talking about the latter possibility would draw Powell into a conversation about dealing with things that mean (at least in the eyes of the market) the big effects of Trump’s expected policies. Powell has promised not to talk about the expected policies, let alone act.

So, to say that raising interest rates is about growth is getting away with it. Perhaps Powell and his team encode rising long-term interest rates differently than we do here.

They may have very good reasons to believe that it is about growth and not inflation or financial expectations. But the important point here is not to cast doubt on his integrity, but rather to highlight the delicate balance he will have to strike in the coming months, as he takes shape Trump’s policies are clearer, or worse, these policies are not getting clearer at all.