Trump vs. Yellen: Investment Newsletter Guides Advisors On Fed Policy

President Elect Trump is bumping heads with Fed Chair Janet Yellen. Can Trump Fire Yellen? How much does Trump policies conflict with Yellen?

Palm Beach Gardens, United States – December 20, 2016 /PressCable/ —

Potential differences between the two have been apparent for months, as Trump criticized the Fed on the campaign trail in two specific ways. First, he said the Fed has kept rates too low for too long, and has created multiple bubbles to prop the economy up. Second, he said the Fed kept rates ultra low to support the economy and get Clinton elected.

Since he won the election, Trump has stayed quiet on the Fed, although there were a lot of us watching Twitter following Wednesday’s FOMC meeting to see whether Trump would respond to what some interpreted as criticism by Yellen towards Trump/Republican fiscal policy.

The Sevens Report wants to explore those comments and explain 1) Why they were hawkish and 2) What they mean for the Yellen/Trump relationship going forward.

Yellen’s Hawkish Point #1: It’s too Late For Fiscal Stimulus

Yellen was very explicit in the FOMC press conference in saying that large-scale fiscal stimulus was not needed now that the economy is basically at full employment, as it would risk igniting an acceleration in inflation (she is basically saying that fiscal stimulus now would do more harm than good, a direct contradiction to what the new administration is saying).

To understand her reasoning, imagine we’re trying to keep a fire going that’s almost gone out (the economy post 2008). To get the fire roaring again, we need kindling and wood (0% interest rates & QE) and a match (fiscal stimulus).

But, we don’t have any matches (there’s been no fiscal stimulus since ’08, and if anything, over regulation has inhibited growth). To keep the fire alive we keep heaping kindling (QE) and wood (0% rates) on top. And that partially works, and the fire doesn’t go out… but it doesn’t really grow, either (2% GDP growth since ’08).

Now we are left with a small fire, but a tower of wood and kindling above it that hasn’t caught on fire yet.

Then, after years of this we begin to see the fruits of our labor start to pay off as the lower logs are finally catching fire (full employment and an uptick in growth in 2016). Now we’ve got a fire that’s starting to grow, but we’ve got way too much wood and kindling on top of it, so we begin to remove the wood to make sure the fire doesn’t burn out of control (removing wood is equivalent to rate hikes).

Then, all of a sudden, someone comes along with a flame thrower (large-scale fiscal stimulus) and the risk is if they hit our tower of wood with this flame thrower before we can remove some of the logs, we’ll have an out of control inferno (surging inflation).

That’s basically the reasoning behind Yellen saying the economy doesn’t need large-scale fiscal stimulus right now (we needed it several years ago, before the theoretical tower of logs got too big). Now, I’m not saying I necessarily agree with that logic, nor am I endorsing it, but that is why she said what she did.

The reason this is a potential problem with Trump is because if Yellen stays on this message, then she is basically contradicting the administration and saying it’s doing the wrong thing economically. And we all know how publicly criticizing Trump has gone over during the last 18 months—he yelled at the Pope, so I doubt Yellen is off limits!

Point being, there is the potential here for a very public disagreement, and that’s not good for investor sentiment or the markets.

Hawkish Point #2: The Fed Isn’t Trying to Overheat the Economy

As The Seven’s Report stated last week, Yellen’s tone in this press conference was oddly defensive, and we can reasonably conclude it was in response to criticism of the Fed’s policies during the campaign season.

Specifically, Yellen very pointedly said the Fed was not trying to run the economy “hot,” i.e. keep rates lower than they should be solely to generate strong growth while ignoring the potential negative effects of inflation.

That comment was her rebuking Trump’s assertions that the Fed has 1) Kept rates too low to prop the economy up via the creation of asset bubbles, or 2) Kept rates too low to support growth so that Clinton could get elected. Again, this was surprisingly pointed, and the takeaway is clear. Yellen is aware of Trump’s criticisms, and apparently isn’t going to take them without response (although obviously never directly).

Bottom Line

Quite simply, I (and no one I’ve spoken to) remembers a time when a public spat between the president and the Fed chair was this likely to occur. That will have implications across assets: stocks, bonds, currencies (especially the dollar) and commodities (esp. gold and oil). And, this dynamic leaves us with some pretty strange questions to ponder as we enter 2017.

Will Trump accuse the Fed of political motivation if they continue to hike rates, and if that hurts growth? If the Fed hikes faster following fiscal stimulus, will Trump see it as undermining his economic plan, and will he then launch a Twitter attack? Will Trump mock or belittle Yellen publicly?

Shocking as it may sound, these all are real questions that will likely be answered early in 2017, and we need to understand the implications of those answers if we’re to start 2017 off on the right foot.

Click here to get more information on The Sevens Report.

For more information, please visit http://acerstrategies.com

Contact Info:
Name: Everett Wilkinson
Organization: Acer Strategies
Address: 4521 PGA Blvd. Suite 115, Palm Beach Gardens United States

Release ID: 156005