Best of the Week
Most Popular
1.Bitcoin War Begins – Bitcoin Cash Rises 50% While Bitcoin Drops $1,000 In 24 Hours - Jeff_Berwick
2.Fragile Stock Market Bull in a China Shop -James_Quinn
3.Sheffield Leafy Suburbs Tree Felling's Triggering House Prices CRASH! - Nadeem_Walayat
4.Bank of England Hikes UK Interest Rates 100%, Reversing BREXIT PANIC Cut! - Nadeem_Walayat
5.Government Finances and Gold - Cautionary Tale told in Four Charts - Michael_J_Kosares
6.Gold Stocks Winter Rally - Zeal_LLC
7.The Stock Market- From Here to Infinity? - Plunger
8.Ethereum (ETH/USD) – bullish breakout of large symmetrical triangle looks to be getting closer - MarketsToday
9.Electronic Gold: The Deep State’s Corrupt Threat to Human Prosperity and Freedom - Stewart_Dougherty
10.Finally, The Fall Of The House Of Saud - Jim_Willie_CB
Last 7 days
Stock Market More Correction Ahead? - 19th Nov 17
Universal Credits Christmas Scrooge Nightmare for Weekly Pay Recipients - 18th Nov 17
Perspective on the Gold/Oil Ratio, Macro Fundamentals and a Gold Sector Bottom - 18th Nov 17
Facebook Traders: Tech Giant + Technical Analysis = Thumbs Up - 18th Nov 17
Games Betting System For NCAA Basketball Sports Betting - Know Your Betting Limits - 18th Nov 17
Universal Credit Doomsday for Tax Credits Cash ISA Savers, Here's What to Do - 18th Nov 17
Gold Mining Stocks Fundamentals Q3 2017 - 17th Nov 17
The Social Security Inflation Lag Calendar - Partial Indexing - 17th Nov 17
Mystery of Inflation and Gold - 17th Nov 17
Stock Market Ready To Pull The Rug Out From Under You! - 17th Nov 17
Crude Oil – Gold Link in November 2017 - 17th Nov 17
Play Free Online Games and Save Money Free Virtual Online Games - 17th Nov 17
Stock Market Crash Omens & Predictions: Another Day Another Lie - 16th Nov 17
Deepening Crisis In Hyper-inflationary Venezuela and Zimbabwe - 16th Nov 17
Announcing Free Trader's Workshop: Battle-Tested Tools to Boost Your Trading Confidence - 16th Nov 17
Instructions to Stop a Dispossession Home Sale and How to Purchase Astutely at Abandonment Home - 16th Nov 17
Trump’s Asia Tour: From Old Conflicts to New Prospects - 16th Nov 17
Bonds And Stocks Will Crash Together In The Next Crisis (Meanwhile, Bond Yields Are Going Up) - 16th Nov 17
A Generational Reset That Will Redistribute Wealth to the Bottom 60% Is Near - 16th Nov 17
Ethereum (ETH/USD) – bullish breakout of large symmetrical triangle looks to be getting closer - 16th Nov 17
Gold’s Long-term Analogies - 16th Nov 17
Does Stripping Streets of ALL of their Trees Impact House Prices (Sheffield Example)? - 15th Nov 17
The Trump Administration’s IP Battle Against China - 15th Nov 17
5 Ways Bitcoin can Improve its Odds of Becoming the Future of Money - 15th Nov 17
These Headlines Say Gold is Building a Base for Something Big - 15th Nov 17
Protect Your Savings With Gold: ECB Propose End To Deposit Protection - 14th Nov 17
Gold on the Ledge, Trend Forecast - 14th Nov 17
The Unbearable Slowness Of Fourth Turnings - 14th Nov 17
Silver Sign’s Confirmation & More - 14th Nov 17
Could This Be The End for Tesla? - 14th Nov 17
Harry Dent’s Fourth Cycle: More Evidence of Stock Market Downturn - 14th Nov 17
Why Having Good Credit Is Important If You Want to Invest - 14th Nov 17
The Bitcoin Bubble Explained in 4 Charts - 13th Nov 17
How the US Has Secretly Subsidized China to Produce Eco-Unfriendly Solar Panels - 13th Nov 17
The Increasingly Unstable Middle East Must Be On Every Investor’s Radar - 13th Nov 17
Stock Market Critical Supports are Being Challenged - 13th Nov 17
The One Chart All Investors Should See Before 2018 - 13th Nov 17
Short-Term Stock Market Uncertainty Following Recent Rally, Will Stocks Continue Higher? - 13th Nov 17
Is Hillary Just the “Fall Guy” for the Intel Agencies and their Moneybags Bosses? - 12th Nov 17
Stock Market Correction Phase - 12th Nov 17
Finally, The Fall Of The House Of Saud - 12th Nov 17

Market Oracle FREE Newsletter

Traders Workshop

Brace Yourself, There May Be An Epic Collision Between Trump and Yellen

Interest-Rates / US Federal Reserve Bank Feb 10, 2017 - 04:50 PM GMT

By: John_Mauldin

Interest-Rates

BY JARED DILLIAN : The FOMC recently held its first meeting since Trump took office. But before I get to that, I want to talk about the backdrop to the meeting… Trump’s relationship with Yellen and Yellen’s relationship with Trump.

Trump hasn’t had much good to say about Yellen. He said that her interest rate decisions were politically motivated. Hey, I was saying the same thing at the time. No disagreement out of me. No rate hikes for years, and now that Trump is elected, the Federal Reserve is suddenly keen on hiking with renewed vigor.


But let me tell you—as much as Trump does not like Yellen, Yellen does not like Trump. You couldn’t find two more opposite extremes. Yellen is about as cautious and risk-averse as it gets. Trump is like a drunk at the poker table, playing every hand, losing a lot of small pots, then next thing you know you’re losing a big hand to him.

I’m not even sure they’ve been in the same room, and I don’t know what would happen if they were.

Jawboning the dollar

I have to give the Federal Reserve credit—they take their jobs very seriously. It is not a “hack” institution. These are smart people who dedicate their lives to maintaining the purchasing power of the currency. We can say that they are misguided from time to time, but they are not malicious, and they are not hacks.

But you also have to remember that these are human beings, and human beings have emotions. So if Trump has made it very clear that he wants a weaker dollar—as he did Jan. 31—then you can bet that Yellen probably wants a stronger dollar, at least on a subconscious level.

Trump has been jawboning the dollar lower—with some success:

But what happens if Yellen starts jawboning it higher?

Or what if it’s not jawboning—what if the Fed actually hikes rates? It’s hard to be short USD when rates are going higher.

Yellen is supposed to be around for another year, and I’m guessing that there probably will be some epic collision between her and Trump in the not-too-distant future.

It would be highly unorthodox for Trump to fire Yellen. That almost never happens… mostly because it leads people to believe that the Fed isn’t all that independent. But this is Trump we’re talking about here. (Although I’m dying to know who Trump has lined up as her replacement.)

Monetary policy is in for a rapid change

Here is the reality of it: there are two vacancies on the Board of Governors that can be filled immediately. Who will Trump choose? I can’t find any speculation on the Internet on this.

Then, next year, Yellen and Stanley Fischer will be gone, so Trump will be able to appoint a chairman and vice chairman.

I’ve seen some names floated for these positions like Martin Feldstein and Larry Kudlow. But Reagan/Laffer supply-side economists don’t seem like the right fit with Trump.

Trump is going to want a trade guy. He is going to want someone who wants the dollar lower. Trump is a debtor. He is going to want someone who will explicitly inflate. (Yes, I know this is pretty much the opposite of what I was saying before, but trade has been the number one focus out of the gate.)

Of course, the number one Trump Trade is still intact: short bonds.

Between the two open seats and the chair/vice chair roles, Trump will have four of his own people on the Fed in the span of a year. And my suspicion is that these four folks will make it very uncomfortable for the Obama holdovers.

Monetary policy is going to be changing very rapidly. I don’t think people are pricing this in. Fact is, we can guess, but we don’t know what is going to happen.

The definition of bad central banking

If Yellen has a grudge against Trump, she sure isn’t showing it.

The FOMC meeting was pretty dovish. They acknowledged rising inflation, but didn’t seem too worried about it. Several Fed officials had said that they want to hike three times this year, but the Fed is well off that pace. Based on the most recent directive, it’s unlikely that they’ll hike in March, which means they’re probably looking at June.

One thing to point out is that the composition of the FOMC is different from one year to the next, as four regional presidents rolled off and four new ones came on. All the dissenters are gone; this is a considerably more dovish FOMC, with Harker, Kashkari, Kaplan, and Evans.

It kind of goes without saying that I believe inflation is ramping, and the Fed (like any government institution) is going to quickly find itself behind the curve. It’s not just ramping in the US—it’s even worse in Europe.

I think this is what happens if you leave rates at zero for eight years and print about four trillion dollars. People have been wondering where the inflation was—well, here it is. And it’s about to get worse before it gets better.

Trump will probably have more to say about Yellen because he doesn’t like Yellen, but the reality is that the Fed’s meeting clearly helped Trump. All of which illustrates that the Fed isn’t a bunch of hacks, or is very concerned with maintaining the perception that monetary policy is not politically motivated.

But not hiking rates when inflation is roofing—that’s pretty much the definition of bad central banking.

Get Thought-Provoking Contrarian Insights from Jared Dillian

Meet Jared Dillian, former Wall Street trader, fearless contrarian, and maybe the most original investment analyst and writer today. His weekly newsletter, The 10th Man, will not just make you a better investor—it’s also truly addictive. Get it free in your inbox every Thursday.

John Mauldin Archive

© 2005-2017 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife