President Donald Trump laid out his most specific plan yet for what the Federal Reserve should do to turbocharge the U.S. economy — lower the central bank's benchmark interest rate by 1 percentage point and reintroduce quantitative easing.
Bond traders entirely ignored his Twitter comments.
In the hour after his tweet, the 10-year Treasury yield moved a fraction of a basis point. The dollar barely budged, as did stocks. Those are the kinds of trading ranges you'd expect on a summer Friday afternoon, not when the U.S. president casts blame on the Fed for preventing the economy from going up "like a rocket," precisely when the Federal Open Market Committee is meeting in Washington.
Now, investors have largely been dismissing Trump's rhetoric for a while, and I feel reasonably confident that fading knee-jerk reactions to his tweets or off-the-cuff remarks would have been a profitable trading strategy over the years. As long as the economy is on solid ground and the S&P 500 is up, traders probably need not set alerts for @realDonaldTrump.
At the same time, Trump has made the central bank and Chairman Jerome Powell frequent targets, and his attacks intensified late last year as the stock markets tumbled. That's when his comments started to matter.
"Stop with the 50 B's," he told the Fed on Dec. 18, referring to the bank's policy of trimming its balance sheet by up to $50 billion a month. The Fed caved soon thereafter, signaling that it would end the runoff later this year, almost certainly earlier than Powell intended. It's open to interpretation just how big a role the president's demand played in the reversal.
One of the more conspicuous elements of Trump's latest criticism is how he has incorporated inflation into the mix. The U.S. has "wonderfully low inflation," he remarked on Tuesday. "Importantly, inflation VERY LOW," he tweeted on April 26. There has been "almost no inflation," he said on April 14, adding that "quantitative tightening was a killer." The Fed made a mistake in raising interest rates, he tweeted on March 29, "especially since there is very little inflation."
This is hardly a coincidence. Fed officials sound intent on getting inflation higher, according to Bloomberg News's Craig Torres, after they consistently missed their 2 percent target since adopting it in 2012. Officials worry they may never reach it if they can't during this current period of strong growth and low unemployment. With the constant reminder of stubbornly subdued inflation, Trump may be trying to goad policy makers into easing.
It's unlikely to work. As I wrote last week, Fed officials are acutely aware that easing policy now would look like they're giving in to this one-sided criticism, rather than acting independently. That means traders are probably getting ahead of themselves in betting on a rate cut this year.
Trump, of course, is trying to tip the scales in his favor by appointing political loyalists to counter Powell. That hasn't worked so well, with former pizza executive Herman Cain withdrawing from consideration for a seat on the Federal Reserve Board and economics writer Stephen Moore facing increasingly uncertain odds.
For some traders, the stakes are high for the Fed's May 1 decision. As Bloomberg News's Edward Bolingbroke noted, the two-year Treasury note futures contract has attracted an unprecedented number of wagers on its direction, with the equivalent of $800 billion riding on the outcome of the central bank's meeting.
The fact that the market barely budged after the president's tweets is a clear signal that traders view it as nothing more than bluster.