In 2015 CTH outlined how candidate Donald Trump’s proposals were in-line with those who had long argued for a return of “economic nationalism”. We also outlined when those proposals (now policy) are implemented, Fed action would be essentially irrelevant.
The Federal Reserve is pegged to the Wall Street Economy. President Trump’s policies are pegged to the Main Street Economy. There is a disconnect; a new dimension in U.S. economics; and very few people understand what happens in this space between them.
Thirty-five years ago Fed monetary policy impacted the U.S. economy directly because almost all activity (durable good manufacturing) was within our borders. The natural dynamic of inflation could be influenced by the Fed. Rate changes could offset inflation and also enhance domestic investment etc.
However, as time progressed that manufacturing activity -the basic underpinning of middle-class jobs, wages etc- shifted overseas. When monetary policy became controlled by multinationals (Wall Street influencers purchasing politicians), capital investment moved to generate purely higher profits. Businesses, specifically manufacturing, went abroad. As a consequence the determination of prices, ie ‘inflation’, was no longer influenced by the Fed because the actual economic activity was/is outside the U.S. borders.
President Trump’s middle-class policy, through tariffs, is intended to bring manufacturing back to the U.S. China and the EU are trying to keep their manufacturing foothold by devaluing their currency and subsidizing their industries.
This action by China and the EU lowers the value of their currency, increases the value of the dollar, and simultaneously lowers the prices of their exports. This offsets the U.S. tariffs, and the China/EU stuff costs less to import. In essence, we import deflation.
No action by the U.S. Fed can change this pricing mechanism because the price determination is outside the reach of the Fed. Hence, the disconnect.
NEW YORK (Reuters) – The U.S. dollar rose to two-year highs on Wednesday after Federal Reserve Chair Jerome Powell, having made the first cut to interest rates since 2008, signaled the move was not the start of a rate-cutting cycle.
[…] In a widely expected move, the U.S. central bank cut rates by 25 basis points to shore up the economy against risks including global weakness. But in the subsequent press conference, Powell said he viewed the cut as a “mid-cycle policy adjustment” rather than a broader loosening of monetary policy.
[…] The statement upended expectations of some market participants who anticipated confirmation of further rate cuts. A day prior, traders had forecast at 35% chance of three cuts by the end of the year; on Wednesday afternoon that figure had fallen to 12%, according to CME Group’s FedWatch tool.
“They acknowledged strong labor markets, recent reasonable signs of moderate growth. It still leaves the playing field wide open as to what they’re going to do in future months,” said Tony Bedikian, head of global markets at Citizens Bank in Boston. (more)
♦RATE CHANGES – Currently multinational investment is in a holding pattern, waiting to see what happens with President Trump’s global trade reset. Manufacturing multinationals don’t know exactly where to put their investment money because they are waiting to see what happens with trade and tariffs. They don’t want to invest in a new China factory only to see the end product become subject to POTUS Trump tariffs.
The Fed views those stalled investment dollars through the prism of a global economy, their historic reference. Financial pundits have also been selling the global economy model for 35 years; so they too mistakenly view stalled (unappropriated) investment dollars as a sign the U.S. economy might be weakening. It ain’t.
We are in the aforementioned flux space where Trump is favoring Main Street…. and all trade policy is shifted therein.
U.S. Federal Reserve lending rates won’t make the multinationals move their investment money until the geopolitical trade reset is worked out. Ergo, lower Fed rates won’t currently help Wall Street…. Nor will lower Fed rates have much impact on Main Street because internal U.S. economic influences are larger and stronger than the Fed influence.
Because the Fed cannot influence prices of manufactured goods, the Fed cannot influence inflation. The U.S. worker wage rates are stronger than any inflation; again the disconnect that CTH has noted for three years that will work in favor of the middle-class.
So long as the Fed is pegged to Wall Street, meaning has primary focus on lending to U.S. manufacturing multinationals; and as long as that lending (investment) is stalled pending the outcome of Trump’s trade and economic reset; the Fed is essentially irrelevant on the bigger dynamic.
If a variable rate mortgage loan goes up by $100/month, and simultaneously (outside of the Fed influence) the worker is getting a $300/month wage increase (currently 5.5% wage growth), there is no material negative impact.
If a variable rate mortgage loan goes down by $100/month, and the worker is still getting a $300/month wage increase, blue collar spending and savings jumps [current status], no substantive downside. The blue-collar spending is a self-fulfilling prophecy. This is the reason why we noted in 2016 the Fed would essentially be irrelevant to Main Street.
The Fed remains pegged to Wall Street.
Trump policy remains pegged to Main Street.
We are in the space between.
Until this dynamic changes and the majority of the underlying economic activity is returned to the U.S action by the Fed is essentially moot to Main Street.
Once the U.S. economy rebalances; meaning once the trade policy brings more production based manufacturing and assembly back into the U.S; and once we reverse the 35-year Wall Street dynamic and become a more production-driven economy (where the best return on investment is inside the USA); then yes, Fed action will start to have influence.
When? Once the USMCA is ratified, President Trump will trigger tariffs on China. This will move all of the multinationals who are in a ‘holding pattern’ because they will see what areas are safe. Capital investment will flow very fast.
Where? The China exodus will benefit North America (USMCA) and those ASEAN nations who have partnered with Trump and made proactive trade agreements. That’s where the capital investment will flow.