Trump Will Come for the Fed

Monday morning, Trump tweeted the following, ostensibly about currency manipulation:

Russia and China are playing the Currency Devaluation game as the U.S. keeps raising interest rates. Not acceptable!

— Donald J. Trump (@realDonaldTrump) April 16, 2018

But it wasn’t about currency manipulation. It was about the Fed. He was laying down a marker for later blame while at the same time preparing the ground for stepping up political pressure when and if the interest rate hikes start to bite. It also serves as a subtle first trial balloon, to see what kind of pushback/reaction he gets—with the ambiguity in phrasing serving as plausible deniability if not well received.

This is obviously conjecture, and it’s hard to get into Trump’s head. But when it comes to tweeting, there is usually a propagandistic method to his madness.

So, let’s take a look at what we do know.

We know Russia is not a major economy by any metric. And what exports it does have (commodities) are not exchange rate sensitive. And Russia doesn’t have a history of competitive FX manipulation. So, it wasn’t about Russia, which was likely thrown in to create the impression of a broader issue.

We know the Chinese exchange rate had been a real issue, but not so much any more. It is one Trump repeatedly mischaracterized/misunderstood during the campaign, but the Big De-peg of 2005 and the massive ULC-adjusted CNY appreciation thru 2013 pretty much took that issue off the front burner.

It’s true that Trump often tries to put lesser or bogus issues on the table in the hopes of getting something for negotiating them away later, and the US is in some sense in trade negotiations with China, but it’s a weak play, the issue wasn’t top-of-mind, and there was no need to reference Russia or the Fed if trumping up a negotiating point with China was the objective.

And we know that the timing makes more sense with respect to the Fed. Rates have been hiked now a half-dozen times, the growth optimism felt back in January has cooled/is cooling. The prospect of a slowing—or even moderating—economy has to terrify Trump, since he has pinned his political hopes on delivering outsized growth. It’s the only play he has. He both needs the Fed to blame if growth falls short and for the Fed to “cooperate” as much as possible. Moreover, his administration announced two new Fed Board governors the day of the tweet, so this issue was top-of-mind. And he has shown zero compunction in trampling on the integrity of any person or any institution that gets in the way of what he wants, whatever the systemic implications.

If you believe, as I do, that growth will soon settle back in with a two-handle and not a three-handle, the temptation for Trump to increase political pressure on the Fed will be too great to resist—unless the GOP and his base revolt in consequence, a bet that recent history suggests is not a good one.