Trump Tries to Shape the Fed to His Dovish Will

Vito J. Racanelli

This is what it sounds like when doves arrive.

In a generally quiet week for Fed-watching, President Donald Trump made some noise. No, he didn’t thump the tub for lower rates again, but in a series of tweets Tuesday he said he is planning to nominate two new people to fill two Federal Reserve Board vacancies. Both are considered interest rate doves, that is, favoring lower rates.

One is well-known economist Judy Shelton, U.S. executive director at the European Bank for Reconstruction and Development, and the other Christopher Waller, the executive vice president of the Federal Reserve Bank of St. Louis.

Trump’s recent Fed nominations haven’t had much luck getting approved. The latter two might be likely to get the nod. Still, Democratic animosity towards Trump is high and getting more intense as the presidential candidate debates take place (See page 10).

Meanwhile, across the pond, another dove was tapped. Christine Lagarde, chairwoman of the International Monetary Fund, was nominated to lead the European Central Bank, after Mario Draghi leaves in October. In terms of easy monetary policy, though Lagarde isn’t a banker, she’s previously supported that approach and is seen as an acolyte of Draghi’s on that topic.

Just as the Fed is grappling with inflation that stubbornly does not meet its target, the ECB is also struggling to hit its medium-term target for price growth of just under 2%. Like the Fed, the ECB is expected to lower rates later this year.

Bond markets liked all the nominations, for obvious reasons. Yields continued inching lower and bond prices, which move inversely to yields, rose. Media reports put this mainly on the dovish appointees to the Fed and ECB, but I think there remains a sufficiently large contingent of investors who are not assuaged by the softened economic data of late, though as Tom Lee points out above this might be misplaced.

The 10-year Treasury note yield was around 2.04%, falling as low as 1.937% at one point, and versus 2.01% the Friday before. And then there are those negative bond rates in Europe. For example, the German 10-year government bond yield is negative 0.36%, with French debt at minus 0.08%. The Italian 10-year government bond yield was about 1.75%.

It’s a strange new world in bond investing. Until things turnaround in Europe—don’t hold your breath for that—yield seeking investors will buy high rated U.S. paper. Why wouldn’t you? Our technical strategist, however, believes that bond yields might have bottomed around these levels (See page 8).

The CME Fed futures market, a pretty accurate indicator of where rates are going, continues to place a 95% probability of a cut at the next FOMC meeting July 31 and another in September.

Upcoming: 7/30-31 - FOMC meeting.

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Vito J. Racanelli
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