Tariff Man Returns and He's Coming for Powell
Doug Nolan
Speculative markets are inherently short-term focused, with notably short attention spans.
President Trump is increasingly fearless.
Stocks have moved on from tariff worries, while the President is determined to push his tariff policies to precarious new extremes.
This predicament turned more pressing this week.
Bloomberg: “Markets Embolden Trump on Tariffs, Stoking Fear of Overreach” and “Markets So Unfazed By Tariffs That It’s Making Trump Bolder.”
Axios: “Wall Street May be Enabling Tariff Policy.”
FT: “The Return of ‘Tariff Man’: The Week Donald Trump Revived the Global Trade War.”
In a Tuesday interview with Fox’s Larry Kudlow, leading Fed Chair candidate Kevin Warsh stated definitively: “Tariffs are not inflationary.”
That’s about when Japan and South Korea received letters notifying them of the 25% tariff rates on exports to the U.S.
Later that afternoon, the President announced a 50% tariff on copper imports.
For good measure, he threw in an additional threat of possible 200% pharmaceutical tariffs.
On Wednesday, more tariff letters: Philippines (20%), Algeria (30%), Iraq (30%), Libya (30%), Sri Lanka (30%), Brunei (25%) and Moldova (25%).
“Trump Escalates Canada Trade Fight with 35% Tariff Threat.”
But the big tariff letter bomb was addressed to Brasilia.
July 10 – Wall Street Journal (Gavin Bade and Marcus Walker):
“President Trump’s threat for a 50% tariff on Brazilian imports expanded his use of punitive duties over matters that have nothing to do with trade, breaking with more than a half-century of global economic precedent.
Trump cited the trial of the president’s close political ally, former Brazilian President Jair Bolsonaro, as the rationale for new tariffs set to take effect Aug. 1 on imports from the largest economy in Latin America.
It is one of the latest—and perhaps most brazen—examples of Trump using tariffs as a cudgel for political priorities outside of trade.”
It's a stretch to argue that a 50% tariff on imports from Brazil would put America first.
Go ahead and assert tariffs aren’t inflationary, as Americans pay higher prices for Brazilian coffee, beef, orange juice, steel, iron ore, and a multitude of natural resources and other products.
Brazil is our 15th largest trade partner, and a rare major economy where the U.S. runs a trade surplus.
This key Latin American economy and democracy was this week pushed further into China’s orbit.
Are American consumers and businesses really going to pay for a fight to bolster Jair Bolsonaro – Brazil’s disgraced far-right former President, under indictment for money laundering and an alleged coup plot (including plans for assassinations)?
July 9 - Reuters (David Lawder, Andrea Shalal and Julia Payne):
“Brad Setser, a former U.S. trade official now with the Council on Foreign Relations, said Trump’s action could easily spiral into a damaging trade war between the two democracies.
‘This shows the danger of having tariffs that are under the unilateral control of one man,’ Setser said.
‘It’s tied to the fact that Lula beat Trump’s friend Bolsonaro in the election.'"
Brazil’s President Lula da Silva responded as expected:
“Brazil is a sovereign country with independent institutions, and it will not take orders from anyone.”
He also stated Brazil would respond with reciprocity to any tariff increases.
Making matters worse, the 50% Brazil tariff notice followed Trump’s threat of additional tariffs on BRICS nations.
“Anybody that’s in BRICS is getting a 10% charge pretty soon… If they’re a member of BRICS, they’re going to have to pay a 10% tariff… and they won’t be a member long.”
July 7 – Financial Times (Michael Stott and Michael Pooler):
“Leaders at the Brics summit of developing nations have lashed out at US President Donald Trump’s latest threat of an extra tariff on nations aligning with the bloc while vowing to double down on efforts to move away from the US dollar.
The 11-nation group, which includes China, Russia and Iran, had already criticised Washington’s unilateral tariffs and attacks on Iran in a final statement from its Rio de Janeiro meeting…
However, a social media post by Trump on Sunday night threatening a 10% extra tariff on pro-Brics countries raised tempers.
Host President Luiz Inácio Lula da Silva of Brazil said it was ‘very mistaken and very irresponsible’ of Trump to ‘threaten other [countries] on social media’.
‘The world has changed.
We don’t want an emperor.
We are sovereign countries,’ he told a news conference…”
The Trump tariff show is risky business – and the world is increasingly exasperated.
Bubbling markets, on the other hand, take it all in stride.
Bloomberg: “Battle-hardened Wall Street Bulls Are Proving Very Hard to Scare.”
Analysts still swallow the T.A.C.O. thing, convinced the President is all bark and no bite.
Art of the deal.
The President has repeatedly shown his hand, willing to retreat when markets get “yippy.”
Still, this week brought important clarity.
President Trump is eager to push his tariff experiment to the limit.
There will be fruitful negotiations and trade deals, but I expect average tariff rates to land at significantly higher rates than currently anticipated.
Markets had the opportunity to interject - but whiffed.
At this point, overthinking the analysis is unnecessary.
Speculative markets have been repeatedly rewarded for ignoring myriad risks – certainly including Trump tariffs.
And so long as dismissing risk is lucrative and propagates bull market genius, then “genius” prevails.
For good reason, the administration is viewed as uniquely pro-growth, pro-speculation, and pro-Bubble.
As for short-termism, throwing caution to the wind, and disregarding longer-term costs, markets and the President are like-minded (codependent).
I’m reminded of an account I read years ago of a Federal Reserve official speaking privately in 1929: “How are we supposed to stop people from doing what they want to do?”
So late cycle.
The S&P500 closed Thursday trading at an all-time high (6,280.46).
I’d pay more attention to the bond market.
Ten-year Treasury yields gained six bps this week, to a four-week high of 4.41%.
Market inflation expectations – the 5-year “breakeven rate” - jumped seven bps to 2.46%, the high since April 9th (up 15bps in nine sessions).
The 10-year “breakeven rate” rose to 2.39%, the high back to March 27th.
Larry Kudlow (Fox Business, July 8th):
“In layman’s terms, a low money supply leads to much lower inflation and lower interest rates.
The inflation rate has come down…
Inflation since January, I think inflation is 1.4% at an annual rate…
That’s a lot of months now, and the Fed ignored it.
Powell is running a crusade against tariffs and fair trade.
That is not his remit as Fed Chairman.”
Kevin Warsh:
“The President and others get accused of playing politics.
But let me see if we can get this straight.
First, Fed leadership blamed inflation on Putin and then on the pandemic.
They’ve got a new one.
Now it’s the President’s fault.
The inflation they said would happen in January, February, March, April didn’t happen.
But I heard very recently, to the applause of international central bankers, Chairman Powell said that inflation is because of tariffs.
Tariffs are not inflationary.
You and I have talked about it for years…
It’s a familiar blame game.
It’s just not the kind of policy the central bank should be pursuing.”
Kudlow:
“Jay Powell did say last year, when he was cutting rates for Biden’s reelection, he said ‘we’re data dependent.’
Now, he’s all the sudden forecast tariff dependent.
It’s a whole new game.
So, you sort of have to assume he’s fighting Trump is what’s going on.
And then you have to assume behind him you have a couple thousand Fed economists fighting Trump.
And behind them, you’ve got 11 Federal Reserve bank presidents – the regional presidents – fighting Trump.
There’s something wrong with this model, and it could use a little perestroika.”
Warsh:
“I think that’s right.
When I was at the Fed, I talked frequently about the need for Fed reform.
Then around a decade ago, I started to say what the Fed needs is regime change.
Well, they’re sure proving it now.
Regime change means new sets of policies.
A new way of thinking about economic growth.
A new understanding of what really drives inflation.
It also means new personnel.”
Kudlow:
“You need new personnel.
You have several levels here.
I want to stay with this perestroika.
You can cut rates by a quarter, a half, or a full percentage point, as Mr. Trump is saying.
Which is fine.
But the underlying problem is a personnel problem.
We know 80% of the donations – something like that – from ‘The Board’ is going to Democrats.
But you have governors on balance that need new change.
You’ve got the Reserve Bank presidents… and you have the economists.
The board in Washington and all the system.
All of that has to be changed.
Personnel matters a lot.”
Warsh:
“The good news is that I’ve spent five, six years there.
There’s still a huge amount of talent there.
But there’s also plenty of dead wood.
There’re also people that need to adjust their thinking to a modern economy.
This isn’t 1978 economics anymore – where we think inflation is caused by high wages.
Inflation is caused by this growth of money that you talk about…
If you look right now, and you could take down the balance sheet a couple trillion dollars, over time and in concert with the Treasury Secretary, that’s a big rate cut that could come.
What it would do is turbo charge the real economy where things are somewhat tougher, and ultimately the financial markets would be fine.
Why is it that financial conditions are so loose?
The IPO markets are booming.
It’s because you have all that money racing around - it’s not helping the real economy as much as an interest rate cut would.”
Kudlow:
“Why not let the yield curve come down?
That will make it cheaper to finance the debt in the near term.
By the way, it will help finance all the tax cuts you’ve got in this big, beautiful bill.”
Warsh:
“Larry, I’ll end with this.
They need credibility to do it.
In September they cut rates, and what happened?
Long-term interest rates went up.
They didn’t have that credibility.”
I’ve respected Warsh’s analysis in the past and, with a gun to my head, would favor him as Fed Chair over (reported candidates) Kevin Hassett and Secretary Bessent.
But he’s spouting flawed analysis.
Bond yields jumped on Fed rate cuts, not so much because of Fed credibility issues.
Slash rates with financial conditions loose and markets speculative, and you’re just asking for inflating price levels.
The Nasdaq100 has returned 18% since the Fed began cutting rates (9/18/24).
Money Market Fund Assets have inflated $769 billion, or 15% annualized.
Gold has surged 30.6%, Silver 25.1%, Platinum 40.2%, and Copper 33.0%.
Bitcoin prices have almost doubled.
Warsh and Kudlow’s focus on “money supply” is a deeply flawed and archaic analytical framework.
I’m all for a major revamp in Federal Reserve doctrine.
But what exactly is the so-called “money supply” that the Fed will use to manage the inflation rate?
The critical issue today is that the Fed is trapped by historic Credit and asset Bubbles – and markets know it.
Contemporary “money” and Credit creation are dominated by institutions outside the Fed’s purview – certainly including the federal government, the leveraged speculating community, and “private Credit”.
In no way is the Fed in control of the monetary inflation process.
Our central bank has for decades accommodated history's greatest Bubbles, including unprecedented leveraged speculation.
Inflate or deflate, Bubble dynamics will dictate the course of Federal Reserve policies.
And the Fed’s balance sheet is the only option for stabilizing system liquidity in the event of major speculative deleveraging.
Importantly, the best the Fed can muster is to “lean against the wind” during periods of speculative excess and resulting marketplace liquidity over-abundance.
The Fed should have held off cutting rates as long as possible.
The current pause is the appropriate policy course.
Anyone today that conjectures “tariffs are not inflationary” should be disqualified to lead the Fed.
We’re in uncharted, tumultuous waters.
No one knows how this will play out – the complex structure of myriad tariffs, their duration, trade war retaliation, supply chain dynamics, and various and potentially conflicting economic impacts.
As we’ve witnessed repeatedly, central banker errors have momentous consequences.
Such a responsibility demands adherence to a conservative tradition of erring on the side of caution.
The confluence of the administration’s tariff policies, the big, beautiful deficit buster, and immigration crackdown beckons for a prudent Federal Reserve inflation focus.
CPI, after all, has now been above the Fed’s 2% target for over four years.
Uncertainties are extreme.
July 9 – Reuters (Bhargav Acharya):
“U.S. President Donald Trump… called on the Federal Reserve to lower the federal benchmark interest rate by at least 3 percentage points, renewing his call for the U.S. central bank to lower rates to help reduce the cost to service the nation’s debt.
‘Our Fed Rate is AT LEAST 3 Points too high.
‘Too Late’ is costing the U.S. 360 Billion Dollars a Point, PER YEAR, in refinancing costs.
No Inflation, COMPANIES POURING INTO AMERICA.
‘The hottest Country in the World!’
LOWER THE RATE!!!’ Trump wrote on Truth Social.”
The President is clearly eager to move forward with Federal Reserve “reform.”
July 10 – Associated Press (Josh Boak and Chris Megerian):
“President Donald Trump is escalating his pressure campaign to get the Federal Reserve chairman to either lower interest rates or quit his post by targeting the expensive renovation at the central bank’s headquarters.
The latest step came… when Russ Vought, Trump’s top budget adviser, sent a letter to Federal Reserve Chairman Jerome Powell saying the president is ‘extremely troubled’ that plans may have violated government building rules with an ‘ostentatious overhaul.’
Trump also named two close aides to an obscure commission who plan to review the Federal Reserve building plans — another avenue to increase scrutiny on Powell…
This follows a near-daily drumbeat of criticism that Trump has leveled at Powell, whom he has disparaged as ‘a very stupid person’ who should ‘resign immediately.’
It’s an unprecedented attempt to reshape the Federal Reserve’s traditional role as an autonomous arbiter of U.S. monetary policy.”
July 9 – Axios (Hans Nichols):
“Sen. Bernie Moreno is recruiting more GOP senators for his pressure campaign to force Federal Reserve Chair Jerome Powell to resign.
Powell has resisted calls from President Trump to leave his post early, enduring mockery and meanness from the very president who appointed him in 2017.
Moreno (R-Ohio) wants to broaden the case against Powell and amp up the pressure to persuade the Fed to lower interest rates more quickly.
A member of the Senate Banking Committee, Moreno is also setting the stage for the confirmation process for the next Fed chair.
Powell's chairmanship ends in May 2026.
So far, Moreno and Sens. Tommy Tuberville (R-Ala.) and Rick Scott (R-Fla.) are the only senators to have called on Powell to resign…
‘Your choice not to lower interest rates despite the Trump Administration’s economic progress is costing our country $400 billion per year,’ Moreno wrote to Powell...
‘You should resign immediately and allow the President the deference to select someone he feels can make the changes needed to restore the credibility of the Federal Reserve System.’”
In a Friday afternoon Bloomberg interview, senior White House advisor Peter Navarro said the bond market views Chair Powell as “a clown.”
I guess we’ll find out soon enough.
Is the administration moving to use the Federal Reserve reconstruction project and Powell’s testimony on the subject as grounds for dismissal?
Will Congressional Republicans bend to the pressure of the President to investigate Powell?
Slimy.
It was only one week, but global bond markets seemed a little uncomfortable with The Return of Tariff Man.
German bund yields surged 12 bps (2.73%) and French yields 14 bps (3.42%) - both to highs since the end of Q1.
Italian yields rose 13 bps (3.57%) and Greek yields 11 bps (3.39%) – to two-month highs.
UK gilt yields rose seven bps to 4.62%.
Japanese 10-year JGB yields jumped nine bps to 1.52% - within a few bps of highs back to 2008.
On the back of a strong jobs report, Canadian 10-year yields surged 15 bps to 3.50%, the high since the mid-January yield spike.
Australian yields jumped 13 bps this week to 4.33%.
Treasuries and global bonds appear vulnerable.
They won’t, though the administration should tread carefully with all the pressure to lower rates and the vile assault on Powell.
Attacks on the institution of the Federal Reserve have unappreciated costs.
I expect international investors, in particular, to have major concerns with a Trump administration Federal Reserve “reform” effort.
Drawing the Fed into the political muck is a mistake.
How the leveraged speculating community reacts to an assault on Fed independence is a big wild card.
I’ve had the view that extraordinary uncertainty is not conducive to speculative leverage.
I’m not ready to throw in the towel on this analysis.
The ECB has slashed rates 100 bps so far this year (to 2.15%), yet German yields have jumped 36 bps y-t-d.
The Bank of England policy rate was reduced 50 bps (4.25%), though gilt yields are up five bps.
The Bank of Canada has cut 50 bps (2.75%), and 10-year yields rose 28 bps.
The Reserve Bank of Australia has reduced rates 50 bps (3.85%) y-t-d, with 10-year yields down only four bps.
Japanese yields have surged 42 bps so far in 2025, after a 25 bps increase in the policy rate.
Global bond markets are signaling a new paradigm of market yields increasingly disconnected from central bank policy rates.
Loose monetary policies are no longer automatically transmitted to lower bond yields.
This is easily explained by surging bond issuance, mounting debt levels, and now structurally elevated inflation risk.
A case can be made that global bond markets have grown leery of loose policies stoking inflation.
The Trump administration would be well-advised to back off its attacks on Powell and monetary policy, focusing instead on sound fiscal and trade policies.
0 comments:
Publicar un comentario