Futures markets suggest we’ll get just one rate cut from the U.S. Federal Reserve this year. That’s not surprising: The latest U.S. consumer and producer price inflation data has been relatively cool, and Fed Chair Jerome Powell has been sounding hawkish. He has even hinted at reconsidering the treatment of the 2% inflation target as a longer-term average, the one thing currently allowing some tolerance of above-target data.
President Donald Trump is not happy. After criticising “Too-Late” Powell through much of April, the president had to clarify that he isn’t going to remove him from office. Nonetheless, he still thinks the Fed should “lower rates like Europe and China have done” (the European Central Bank cut on April 17, the People’s Bank of China cut last week), and that Powell is a “total stiff.”
The name-calling is revealing, and not just because it underlines the Trump administration’s unconventional ways. The office of U.S. president is endowed with broad executive powers – and this president is testing even these limits. By contrast, numerous Fed officials, many with voting power, have been lining up to explain why it was best to “wait and see” before cutting rates. The Fed chair – hemmed in by process, meticulously chosen words and consensus decision-making – is always going to look like an unresponsive “stiff” to President Trump.
At the top of the U.S. fiscal and monetary authorities, investors face an unprecedented clash of leadership styles.
Process and transparency
When Paul Volcker was tackling runaway inflation in the early 1980s, process and consensus was not the name of the game. His shock therapy – raising rates to 20% and inducing recession – was decisive, unbending and unpopular.
His successor as Fed Chair, Alan Greenspan, began to introduce the elements of process and transparency that we know today, such as published minutes, interest-rate projections and qualitative forward guidance. More recently, Ben Bernanke’s Fed formalized the 2% inflation target. When rates were stuck at zero after the Global Financial Crisis and during the COVID-19 pandemic, the process and public commentary effectively became the central bank’s policy.
In Greenspan’s view, process, consensus and transparency would help protect the independence that Volcker had to fight for, but they would also give capital allocators and investors more certainty, taming the violent cycles that Volcker had to deal with, bringing down the cost of capital and making the economy and its markets more efficient.
Decisive unconventional action, in collaboration with other federal agencies and other central banks around the world, is still possible in a crisis. But the central bank’s day-to-day activity is now deliberate, consensual and jealously independent – and, as an inevitable result, somewhat reactive. “Too late,” if you take the view of President Trump. Predictable and reassuring, if you’re more technocratic.
Move fast and break things
The Trump administration is more ‘tech bro’ than technocratic. It likes to move fast and break things in pursuit of its strategic aims.
In economic terms, those aims might be summed up in Robert Lighthizer’s 2023 book, No Trade Is Free: Changing Course, Taking on China and Helping America’s Workers. Lighthizer sees the post-World War II era as an anomaly and wants the U.S. to embrace the historical use of trade policy and tariffs: protecting and developing certain industries; reciprocating and retaliating against other countries’ levies; and raising revenue. In his thoughts about China, he also advocates using trade policy to advance geopolitical ends.
Because it is so unconventional, this strategy necessitates a concentration of trade policy in the executive. It also bypasses the multilateral and technocratic trade architecture built over the past 80 years, envisaging bilateral negotiations undertaken and overseen at the highest administrative levels.
In our view, investors should take care not to mistake the chaos of the past 125 days as a lack of strategy. Just as President Trump’s first term effected a paradigm shift in the way other political parties and other countries thought about China, we think this term is likely to leave us with more bilateral, more protectionist international relations, regardless of who wins the next U.S. elections.
The chaos comes not due to lack of strategy, but due to the administration’s tactic of testing practical limits in pursuit of its strategy. In crude terms, it is figuring out what is possible as it goes – as opposed to assuming what is possible based on some informed consensus and adapting the strategy to fit.
Bubbles
Whereas Powell’s leadership style is designed to minimize the cost of capital, Trump’s style seems to raise it, in the form of higher stock market volatility, wider credit spreads, climbing Treasury yields and a rating agency downgrade.
As investors, however, we don’t automatically side with the Powell style. Leading by consensus at central banks has arguably resulted in reflexively low real interest rates and artificially low volatility in both financial markets and credit cycles. That, in turn, has allowed successive bubbles to be inflated in technology stocks, U.S. real estate and government debt. A little more mystery around Fed policymaking might have mitigated or even prevented those bubbles.
Should that be how we think about the Trump administration’s tactics? Recent policy uncertainty has made U.S. government debt less affordable and the U.S. dollar weaker. This could be seen as needlessly raising the cost of capital. But it could also help to deflate a multidecade bubble in debt-fueled U.S. consumption and force a return to a more sustainable manufacturing- and exports-based economy.
While that explanation fits with the apparent long-term strategy, it doesn’t follow that these are sensible tactics. Uncertainty and risk are healthy in small doses. Decisiveness can be powerful when tempered by informed consideration. But sheer disruptiveness could, in itself, lead investors to demand higher risk premia than are necessary to achieve the strategic aims.
President Trump and Chair Powell sit at opposite policymaking poles, and both could take a lesson from the other—not least because, ultimately, the fiscal and monetary authorities need to work together.
Brad Tank is Co-Chief Investment Officer and Global Head of Fixed Income at Neuberger Berman, a sponsor of Firstlinks. This material is provided for general informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. You should consult your accountant, tax adviser and/or attorney for advice concerning your own circumstances.
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