Asia couldn’t be happier that the Federal Reserve just took interest-rate hikes off the table. Yet the region hasn’t seen the last of its troubles from America’s central bank.
Not so much Chairman Jerome Powell, but the political chaos looming over the Fed’s 2019. The source, it almost goes without saying, is President Donald Trump’s embattled White House.
Try as he may, Powell will have a hard time dispelling perceptions he caved to Trump. It’s entirely possible that Powell & Co would’ve left rates alone Wednesday even if the US president hadn’t called it “crazy.” Perhaps underlying economic dynamics support a shift into “wait-and-see” mode on tightening.
The optics are troubling, though, if for no other reason than where Trump goes next with his anti-Fed rhetoric. Will he feel emboldened to jawbone the Fed to cut rates back toward zero? And, it follows, will he carry through on threats to push the dollar lower, ruining Asia’s year?
The odds are, the answers are “yes” and “yes.”
Trump, after all, wanted to fire Powell as recently as late December. The Fed is independent for a reason. From a recent Bloomberg report, we know Trump “many times” discussed aloud sacking his hand-picked Fed leader.
By now, markets get that Trump doesn’t care about political guardrails. In May 2016, Trump, a man with a long history of driving casinos into bankruptcy, actually flirted with the idea of default. Asked by CNBC how he’d respond if the US issued too much debt, then-candidate Trump replied: “I would borrow knowing that if the economy crashed, you could make a deal.”
In January 2018, he, Switzerland that “obviously a weaker dollar is good for us as it relates to trade and opportunities” and that the specter of a drop is “not a concern of ours at all.”
Trump’s next focus is almost sure to be the dollar. Getting Powell to back off on rates was the first step in that direction. Next is likely to be prodding the Fed to cut rates. Odds are growing, too, that Trump will direct Treasury Secretary Steven Mnuchin to act on the White House’s weak-dollar ambitions.
Though Trump long complained exchange rates are “killing us,” it was Mnuchin who 12 months ago suggested the gripe might become operational. In January 2018, he, Switzerland, that “obviously a weaker dollar is good for us as it relates to trade and opportunities” and that the specter of a drop is “not a concern of ours at all.”
Team Trump stepped back from the brink a day later as markets tanked. That calculus is changing after the Dow Jones Industrial Average ended 2018 in the red. So far, it is down 4% in 2019. Chatter about slowing US growth is growing loader amid surging public debt, which about the US$22 trillion mark.
Trump’s legislative prospects are nil just as intensifying investigations dog his presidency. That has him looking for quick wins overseas. One clear target: a bilateral trade deal with Japan. Another is boosting US manufacturing via a weaker dollar.
Here, Powell holding short-term rates steady in the 2.25%-2.50% range is unlikely to placate the White House. Not when Trump has explicitly blamed the Fed for the vicious December sell-off in stocks. Despite the chaos emanating from his administration, Trump could always point to giddy stocks as proof his policies were working after the Dow surged 24% in 2017.
In Trump’s view, the quickest way to reignite the rally may be Fed support. But stepping up his public brawl with the Fed poses two big risks for Asia – surging US Treasury yields (Asian governments owns trillions of dollars of US Treasuries) and less competitive exchange rates.
Export data already point to accelerating downshifts in Japan, Singapore, South Korea, Taiwan and elsewhere. A rising yen is the last thing Prime Minister Shinzo Abe needs as headwinds zoom Japan’s way. The same goes for South Korea’s Moon Jae-in, who needs all the growth he can muster to press on with vital structural reforms.
Surely, a respite from the Fed’s rate cycle – three tightening moves last year alone – is a plus for Asia. But as Trump puts the screws on the world’s biggest monetary power, it’s best to tighten those seatbelts a bit.