Fed by the Fed

“Don’t fight the Fed.” — Old Wall Street advice

The Federal Reserve Bank can have a key role in elections. When the Fed raises interest rates it slows down the economy and a slowing economy can have an adverse effect at the polls for the incumbent. George H.W. Bush blamed the Fed under Alan Greenspan for costing him his re-election in1992.

And Donald Trump is well aware of this correlation ... and so has been challenging the Fed chairman he appointed, Jerome Powell, to help him out in next year’s election. For the last nine months Trump has been cajoling Powell to stop raising rates and start cutting them. This pressure has had some effect. Last December the Fed was expected to raise rates for the six straight time under Trump ... causing the December stock market swoon. At that time the interest rate futures market was also expecting at least three Fed rate increases in 2019.

When Powell indicated in late December that these assumptions were wrong, the market had a dramatic turn-around and has been on a tear ever since. During this short period, the 10-year government bond has dropped almost 1.5 percentage points to near 2%. This is quite a dramatic move and has caused one other major event ...

China has been playing the rope-a-dope on tariffs expecting that the previous high rates combined with the economic impact of its tariff war with the U.S. would undermine Trump’s 2020 chances. However, recent events suggest Xi is rethinking this tactic. Trump and Xi agreed today that they would indeed meet at the G-20 summit in July to further their tariff discussions. This, to me, suggests that Beijing now believes that Trump is here to stay for 5 1/2 more years ... and that they better cut a deal while they can. Many companies are relocating their manufacturing out of China and, despite what its phony statistics say, it economy may actually be contracting. If so, Trump has them, with Powell’s help, by the short hairs ... and I think he now knows it.

This change in tariff-agreement expectations is enhanced by China’s partial capitulation toward the Hong Kong demonstrations and Xi’s upcoming visit to North Korea ... where I expect he will pressure Kim to cut a nuke deal with Trump.

I know it is dangerous to celebrate too early ... but I am getting out my pom-poms. If China and North Korea soon come around toTrmp’s way, I will be even more sure of Trump’s re-election.