The U.S. Federal Reserve essentially is a one-trick pony: they can suppress Treasury interest rates and pretend that the economy is running smoothly, but there’s not much else in their threadbare bag of tricks.
FED Chairman Jerome Powell is great at keeping the charade going, but after two years of taking verbal abuse from the President, he’s finally starting to crack. He is under enormous pressure to find excuses to lower interest rates – and his go-to excuse of 2% inflation isn’t working anymore.
The FED’s target inflation rate of 2% just isn’t panning out: core inflation (which doesn’t include volatile food and energy prices) only rose 1.6% in May from a year earlier. Just two months ago, he was anticipating higher inflation, but now he’s forced to concede that inflation isn’t likely to reach his target anytime soon. One thing that this decade has proven to me is that the FED has a high degree of theoretical understanding of inflation, but within its scope of tools, it cannot dictate where the wind will blow.
That’s bad news for President Trump, who wants to see a weaker U.S. dollar because he wants to encourage the international trade of American goods and pay down the national debt. It’s even worse news for the FED Chair, as his favorite rate-cutting weapon has now been blunted.
Trump wants a weaker dollar, but he doesn’t want de-dollarization. He believes that the U.S. dollar is the greatest currency the world has ever seen: dependable, dominant, reliable, the Almighty King Dollar. And he wants it to be about 10%-15% cheaper, so that it can retain its reserve currency status for a while longer.
Of course, you and I both know that the U.S. dollar can’t be number-one forever. Russia, China, India, and other powerful nations are de-dollarizing and replacing it with gold month after month. And then there’s the cryptocurrency threat: Trump and Powell both can’t stand Facebook’s Libra Coin because it has the potential to shift billions of users away from fiat money and towards a more efficient and devaluation-proof blockchain-based economy.
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Powell and Trump both hate Bitcoin and the Libra Project – they can’t stand the competition, and the thought of America losing its status as the world’s supplier of monetary value is absolutely terrifying to the nation’s most powerful banking cartels and political elites. This is way beyond Trump and Powell losing their jobs; it’s about the government literally becoming obsolete.
Courtesy: Bureau of Labor Statistics
Besides 2% inflation, the Fed’s other stand-by excuse for cutting interest rates is low job growth. Again, Powell didn’t get the numbers he was hoping for, as employers unexpectedly added 224,000 jobs in June – a big jump, indicating that the market didn’t need the Federal Reserve to come to the rescue with its rate-cutting axe. The FED is admitting being way wrong on the natural level of unemployment, which they assumed was 5.4%, then 4.5%, and now 3.9%.
Like Powell, President Trump didn’t get what he wanted: in the face of crippling fiscal deficits, he didn’t get the numbers he needed so that his Fed Chair hireling could quickly cut interest rates and clear a path to easy deficit reduction. Now, Powell is really reaching for excuses: trade uncertainties, concerns about global growth weakness… he’s getting more desperate by the minute.
His party wants Trump to pay off the debt; the markets want rate cuts right now; everybody in the government just wants to keep their job. I’ll be watching closely to see if the Fed comes up with any new surprises; most likely, though, they’ll just stick to the only tricks they know and hope for the best – meaning that America and the world should expect the worst.
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