Did the Fed cause the slowdown with the bonehead December rate hike? Or did the president cause the slowdown with his trade war with China?
I would love to think this question doesn't matter for stocks. We care about what's going to happen, not what has happened. That the Fed is now set to lower rates because of recent weakness is huge. We got enough hints in its turgid statement and in the Fed chief's tacit comments that the next move for rates is down. Ladies and gentlemen, the rate-tightening cycle is now over. The rate-cutting cycle is soon to begin, and you need to own more stocks when that occurs.
You own more stocks because business should be better with lower rates. You want to own more stocks when the comparing assets, in this case bonds, falter vs. higher yielding stocks. You want to own more stocks when there is lower inflation and the Fed's clearly saying that could occur.
Let's refresh and go over the playbook I know has worked for the last forty years. When the Fed is about to cut rates --the situation we now find ourselves in -- you buy stocks. Even as federal funds rate is targeted to be 2.25% to 2.50%, a historically low place to start a new rate-cut cycle, it looks like that's what we are going to get -- perhaps as soon as the July meeting. That's just plain bullish, bullish enough to prolong a rally, at least until we hear what's next on trade. Stocks would not only have gone up in a normal time, I think we would have taken out the all-time highs, something we are very close to doing.
But this is no normal time in Washington. That's why when Powell droned on in a kind of staid and professorial way about how the Fed is above the political fray, I couldn't help think this man, this man who declared he is going to serve out his four-year term no matter what, is sitting on a huge powder keg.
Let's review what happened, and then I will tell you what is going to happen.
First, at the beginning of his deliberately soporific press conference, Jay Powell talked about how we have a strong consumer economy and there are lots of jobs out there to be had. That's fantastically bullish. It would not be a reason to cut rates. If anything it, would be a reason to raise rates.
The downside risks, he advanced, aren't coming from the consumer, they are coming from weakness in business. The Fed chief said there's slowing business investment, weaker manufacturing and faltering consumption.
Theoretically, if these negative business trends continue, then employment will soon not be as strong as it is. The consumer will be weaker. That's what the Fed is "closely monitoring" -- the phrase I wanted to hear to get the rate-cut cycle going again. The Fed is worried that the business side of things will bleed into the consumer and that's a natural, empirical, concern.
Now the Fed chief didn't come out today and directly cite President Donald Trump's tariffs on China as a reason why the business portion of the economy has weakened and now threaten the consumer. But it's impossible to pin the tariffs on anyone but the president. Powell did say that trade news has colored the Fed's thinking, which, again, says that the Fed is cognizant that the prosecution of the trade war may require lower rates. But he kindly and respectfully to the president didn't link tariffs with the slowdown. He made no pronouncements about whether the trade war is good or bad for the economy. He was a total gentleman about it.
So why is he sitting on a powder keg?
Because the president is no gentleman. The president wanted a rate cut. He probably wanted a huge rate cut. The president, I think, doesn't want to admit that we need one because of the tariffs. That would undermine his stated narrative that tariffs are actually good for the economy. Higher rates, he will say, are what's bad and Powell didn't take back that horrendous December boost. Had he, the president will say, there wouldn't be any slowing.
The president is a fabulous cake baker and cake eater and he doesn't want Powell to have any of it.
So here's what happens next. I think the president hammers Powell and demands a rate hike now. I think he wants Powell to give a mea culpa and explain why he's going to cause a recession unless he speeds up the cuts.
By not acknowledging pointblank that the slowdown is caused by fears of more tariffs on top of what we already have, Powell may have thought he immunized himself from name-calling. Maybe he thinks he won't be given a moniker like Crooked Hillary or Crying Chuck or Sleepy Joe. Perhaps he feels he will not be called Boring Jay, and then receive some wrath from the White House.
I think he's wrong.
The president's got to lay down the blame game right now before it's too far from the meeting.
Classically Powell's doing exactly what he is supposed to. He's weighing the evidence. We get weaker employment, he will act. We get slowing consumer spending, he will act. But what he won't do is cut because we are about to get additional tariffs on $300 billion on imports after the G-20 meeting with Chinese President Xi Jinping fails, which hi think it will.
What does President Trump really want besides summoning Powell to the board room -- oops I meant the Oval Office -- and telling him he is fired? What does the president seek besides the humiliation of seeing Powell going down the elevator and hailing a cab, not even calling an Uber -- but then again "The Apprentice" really was in a pre-Uber area, something worth mentioning particularly because Uber (UBER) , the stock is now only pennies from where it came public. What a comeback.
No, Trump wants all of his employees to toe the line, and he mistakenly thinks that Powell is an employee who works for him just like the Attorney General works for him, to use an awkward example.
He wants Powell to say the following: "We are cutting rates because we are going to be in trade wars with everyone and we need to keep the dollar down" -- which is something lower rates should do. He wants Powell to say that he understands that Trump is trying to make America great again and to do that he has to get on the team and be as accommodating as his European counterpart, Mario Draghi. He has to be ready to take rates as low as possible to defeat the currency-manipulating Chinese. He wants Powell do to his bidding like everyone else, and he did not do that bidding today.
That's why I worry that the humiliation will only increase, because the president wants so badly to raise tariffs everywhere he sees unfairness and to do that he needs rates back to 1% to 1.5%.
So, I say, buckle up. We heard the mild-mannered Powell give you an avuncular, stentorian analysis of why they did nothing at a time when a firebrand populist president wanted at least a half-point cut because the tariffs are going to come hot and heavy now and the Fed chief's not on the team.
If you are not on the team, you are against the team. This is why, even though you most certainly want to be more invested when a rate cycle begins, it isn't beginning fast enough to offset the coming -- and necessary -- pain from the tariffs we're about to see.
