Last week President Trump criticized Fed Chairman Powell in measured tones:
- “I think he’s a good man. I think he’s trying to do what he thinks is best. I disagree with him, … I think he’s being too aggressive, far too aggressive, actually far too aggressive.”
He added the following about the possibility of Powell raising interest rates next week:
- “I think that would be foolish, but what can I say?”
You don’t have to guess what followed. Journos piled on President Trump, Democrats went virulent – all because President Trump had, in their opinion, violated the “sacred” independence of the Federal Reserve.
1.”Independence” of the US Federal Reserve
This tumult about the independence of the Fed led us to wonder whether such independence was actually an unalienable right. So we looked up the Declaration of Independence. It says all of us “are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.”
No mention of the US Federal Reserve there. No mention of independence of monetary policy either. We also googled to find out whether there is a constitutional amendment declaring the US Federal Reserve as an independent branch of Government. No such amendment.
The US Federal Reserve is NOT a Supreme Court of US Monetary Policy. Supreme Court judges are appointed by the President and confirmed by the US Senate. But after their confirmation, they are truly independent members of an independent branch of Government. Not the Federal Reserve. The Federal Reserve is answerable to the US Congress and reports to that independent body.
The reality is that the “independence” of the Federal Reserve is a practice, a practice that has been deemed by all three branches of Government as a sensible one. Its semi-sacred status today is mainly due to the tremendous success of Fed Chair Volcker who destroyed the crippling inflation of the 1970s. The image was maintained & even enhanced by the 19-year term of Fed Chairman of Alan Greenspan. He created & maintained an aura of independent wisdom & expertise in those 19 years.
The Congress realizes that monetary policy needs to be conducted with a steady, long term hand and should not be subjected to short term political pressures. Hence the Congress has protected the independence of the US Fed for the last 40 years or so.
But the Fed is not really an “independent” institution and the Fed knows it. President Trump began criticizing the relentless raising of interest rates a couple of months ago. And he has been proven right.
There is a serious disquiet in American financial & political circles right now. There is a feeling of an impending financial crisis. It is now well understood that the straw that may have broken the camel’s back was the ridiculous & terribly loose-lipped comment of Fed Chairman Powell on October 3, 2018 that the Federal Funds rate is “long way from neutral”. Listen to the confused disquiet tone in the 90 second comments of veteran investor Jim Chanos:
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- “what worries me is how fragile we seem to be to small rises in interest rates … at Yale CEO summit, people in interest sensitive industries were talking about the slowdown they have seen in last 2 months in business; this is basically interest rates going from 2.5% to 3% & mortgage rates going from 3.5% to 5%”
Chanos alludes to the huge buildup in debt that might be responsible for this extreme sensitivity to higher interest rates. That buildup in debt is, of course, the result of the Fed policy under the past two chairs – Ben Bernanke & Janet Yellen. Such a buildup from 2003 to 2007 created the destructive bust of 2007-2008; a similar bubble grew under Chairman Greenspan led to the tech-telecom bust in 2000-2002.
Now there is serious worry in New York & Washington DC about another bust, caused once again by raising of interest rates by the current Fed to fix the bubble created by the previous Fed. Chairman Powell has raised interest rates 10 times and now hell is breaking lose in US financial markets.
To his credit, President Trump smelled this coming. They say veteran sailors can look at a quiet sea and smell a hurricane coming. We think veteran real estate people develop a sense of smell about an impending crisis from rate hikes. After all, nothing is more sensitive to interest rates than real estate. That is why President Trump is saying raising rates for the 11th time would be foolish. We could not agree more.
The US Federal Reserve is NOT an independent body. It is an institution created to safeguard the US economy, not to destroy it. The Fed has already severely damaged US economy twice in this century. Chairman Powell needs to move aggressively to ensure his rate increases don’t cause severe damage for the 3rd time in the last 18 years.
2.”Independence” of the Reserve Bank of India
The discussion in the US media about President Trump & the independence of the Fed feels so soft, so polite when compared to the media tumult about the resignation of Urjit Patel, the Governor of the Reserve Bank of India {“RBI”). Everything in India gets discussed in shrill & stupid terms.
But, for once, this shrill stupidity pervaded Bloomberg Asia TV. Yvonne Man & Sherry Ahn of Bloomberg Asia went almost nuts in predicting doom for Indian markets from foreign investors for violating the sacred independence of RBI. They even drowned out common sense comments from Rishad Salamat, their co-anchor at Bloomberg Asia.
That shows how little they know about investors. The Indian Stock market rallied in glee from Tuesday to Friday and Banks rallied even more. This rally came & held despite the negative news of PM Modi’s party losing in three important state elections.
(INDY – Nifty ETF) (HDB – HDBC Bank ADR)
Neither Yvonne Man/Sherry Ahn nor any one else at Bloomberg Asia even broached the issue of incompetence of RBI Governor Patel or the severe damage his stupid policies were imposing on the Indian economy. Patel was a Yale educated disciple of Raghu-Raam Raajan of anti-Fed fame who himself was a failure as the previous RBI governor.
Urjit Patel was his disciple and carried on the destructive policy of withdrawing liquidity from India’s economy. Of course, he did so AFTER completely missing or ignoring mounting problems that led to the near default of Infrastructure Leasing & Financial Services (“ILFS”).
The reality is that the RBI has had an excellent track record in managing the monetary conditions in India. Dr. Reddy, the then RBI Governor, forbade Indian banks to lend to real estate entities in 2006 thus shielding the Indian economy from the bust of that housing bubble in America and the west. Dr. Reddy, his successor Dr. SubbaRao and their predecessors were experienced & knowledgeable about the Indian economy, its liquidity needs and the mechanisms to manage it.
The previous Finance Minister, Chidambaram, did not like the soft independence of the then RBI Governor SubbaRao. Chidambaram forced him to quit and appointed Raghu-Ram Raajan, noted US monetary academic, in his place. Raajan’s tenure was a disappointment especially when contrasted against his image as the James Bond of monetary policy. The current government let him go after his term. But they decided to appoint his deputy & disciple Urjit Patel to assuage any fear among investors. That was a mistake.
Foreign trained academic economists are revered in west-servile India, especially in Indian media. And such people often & quickly get caught up in their own self-importance. Urjit Patel was no exception. as Ira Dugal, editor-Banking at BloombergQuint wrote this week:
- “It’s true that the RBI isn’t the most consultative of institutions but Patel took the closed-door approach a step further. Over the last two years, hearing bankers complain about lack of access to the RBI governor and his top team has become common place. Market veterans who always had access to the governor and deputy governors have found it difficult to explain their views. New-age financial firms have been left in the dark about policy directions that the RBI is likely to take.”
Compare this with the statement of Dallas Fed President Kaplan who told Bloomberg TV that he speaks to about 30 CEOs every month. In stark contrast, we hear that Urjit Patel never even spoke once in his entire tenure to Uday Kotak, head of Kotak-Mahindra Bank & a man who knows virtually everything to know about Indian Banking.
Fortunately, the Indian Government has now gone back to RBI traditions and appointed a veteran insider Shaktikanta Das (phonetically Shakti-Kaant Daas) as RBI Governor. Das is a veteran of IAS (Indian Administrative Service) and is known for his ability to bring differing factions together.
Now, after a long time, the monetary authority RBI and the Ministry of Finance, the economic authority, will work together to improve liquidity conditions in India. No wonder the Indian stock market rallied this week.
3. Back to the US Markets & Economy
So, what is needed for the US markets to rally? Re-liquification of the US economy. And what will get us there? A pause in Fed’s Balance sheet contraction and a pause in the Fed’s interest rate campaign. This is needed not just for US financial markets but for the millions of hard working American workers who are now finally getting wage increases after suffering for 24 years.
You don’t need to believe us. Listen to what Rick Rieder, Global CIO for fixed income at BlackRock, the world’s largest asset manager, said on Fox Business on Friday:
- “something really important, we should put more & more people to work in this economy; wages are accelerating a bit; wages doesn’t mean inflation; what more & more people are doing is saving … the Fed has nothing to worry about; out more people to work; we don’t have to choke off the economy.. & inflation is decelerating“
Isn’t this exactly what President Trump has been arguing for the past 2-3 months?
That’s the caste system in elite America in action, folks. It is ok for an elite of the financial elite like Rick Rieder to say what he did but it is NOT ok for President Trump to say the same thing.
Go figure!
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