Trump turns up heat on Federal Reserve chair as bonds go negative | Business News

It can’t be much fun being Jay Powell right now.

Scarcely a day goes by without the chairman of the Federal Reserve, America’s central bank, being publicly criticised by Donald Trump.

The latest assault came when, on Wednesday, Mr Trump tweeted: “The only problem we have is Jay Powell and the Fed. He’s like a golfer who can’t putt has no touch….so far he has called it wrong and only let us down.”

That barb came 48 hours after the US president tweeted: “Our economy is very strong, despite the horrendous lack of vision by Jay Powell and the Fed.”

He urged the Fed to cut its main policy rate from its current range of 2-2.25% to 1-1.25%. A few days before that, again on Twitter, the president described Mr Powell as “clueless”.

Mr Trump’s hostility towards Mr Powell, whom he nominated in November 2017, is because the Fed has not cut interest rates as rapidly as he wants. Mr Trump, who this time next year will be only three months away from the presidential election, fears the US economy is losing momentum – something he does not want to see going into an election year.

WASHINGTON, DC - NOVEMBER 02: (L to R) U.S. President Donald Trump looks on as his nominee for the chairman of the Federal Reserve Jerome Powell takes to the podium during a press event in the Rose Garden at the White House, November 2, 2017 in Washington, DC. Current Federal Reserve chair Janet Yellen's term expires in February. (Photo by Drew Angerer/Getty Images)
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Donald Trump has launched a series of scathing attacks on Jay Powell in recent months

Unlike previous US presidents, for whom a ‘strong dollar’ was something to be welcomed, he wants to see the greenback devalued in order to make American exports more competitive. This has become something of a priority given the slowdown in global trade growth – caused largely by the trade dispute with China by Mr Trump himself.

Mr Trump also believes other major economies are also devaluing their own currencies for the same reason he wants a weaker dollar. This might be true in the case of China, which this week allowed the renminbi to fall to its lowest level against the US dollar in 11 years, but is incorrect in the case of the euro.

The European Central Bank is expected to cut the cost of borrowing in the Eurozone next month – not to prop up exports, but because growth in the single currency zone is stagnating and the bloc is in danger of being tipped into a deflationary spiral.

Those concerns – along with a wider sense that, thanks to the US-China trade war, a global recession is looming – has led to some extraordinary moves in global bond markets this month.

In US Treasuries, the yield (effectively the interest rate) on 10-year US government debt has fallen this month below that on two-year US government debt. This phenomenon, known as ‘yield curve inversion‘ has in the past been a good predictor in the US of an imminent recession.

Elsewhere, some $16tn worth of bonds globally – mainly government debt but also some corporate debt – are now trading with a ‘negative yield’.

In other words, investors are actually paying bond issuers for the right to lend to them.

All Dutch government bonds due to mature in the next 15 years are trading with a negative yield. All bonds issued by the governments of Sweden, France, Belgium and Japan due to mature in the next 10 years are trading on a negative yield.

Even Spanish bonds with a maturity of up to five years have been trading on a negative yield this week. In the most extraordinary situation of all, Germany’s entire ‘yield curve’ – a curve that shows several interest rates across different maturities of bond sold by the same issuer, such as one-year, two-year, five-year and 10-year – went negative earlier this month.

Almost as remarkably, Germany sold a 30-year bond this week which did not even pay investors a ‘coupon’ (the payment they receive from the issuer), meaning that any investor buying the bond and holding it to maturity is guaranteed to lose money.

All of this activity in the bond markets, which explains why global stock markets have had such a wobbly August, shows how nervous investors are – and this criticism of the Fed by Mr Trump has unsettled them further.

They are used to seeing central bankers being roughed up in countries like Turkey or India but not in the United States where, traditionally, the president has not commented on monetary policy in order to respect the Fed’s independence and autonomy.

Nonetheless, the recent movements in US Treasuries suggest many bond investors expect the Fed to cut rates further in coming months.

WASHINGTON, DC - JULY 10: Federal Reserve Chairman Jerome Powell testifies during a House Financial Services Committee hearing on Capitol Hill on July 10, 2019 in Washington, DC. Powell is testifying on monetary policy and the state of the economy. (Photo by Zach Gibson/Getty Images)
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Jay Powell became chairman of the Federal Reserve in February 2018

The Fed cut its main policy rate on 31 July from 2.25-2.5% to 2-2.25% – its first rate cut for more than a decade – but minutes published this week suggested the policymakers on its rate-setting Federal Open Markets Committee were deeply divided.

Seven members voted alongside Mr Powell in favour of a quarter-point reduction while two more wanted rates left unchanged.

Meanwhile, those members who did vote for a cut did so for different reasons – with some concerned about weaker global growth, some concerned about weak US inflation (one of the two rates, along with the jobless rate, that the Fed is mandated to target) and others simply wanting an ‘insurance’ cut.

That points to a committee not that inclined to give Mr Trump the deeper cuts to borrowing costs that he has been demanding.

So all eyes will be on Mr Powell when, tomorrow, he delivers a speech at the annual symposium of central bankers at Jackson Hole, Wyoming, hosted by the Federal Reserve Bank of Kansas City.

Investors will be looking for Mr Powell to identify more of a ‘framework’ that will inform the fed’s future policy decisions – such as, for example, the extent to which US inflation would have to fall before more serious rate cuts were required – or clues on how the Fed might react if, for example, Germany tips into recession, as is widely expected.

They will also be looking to him for guidance on whether the Fed believes the current strength in the US jobs market can be continued.

And, with another rate cut expected in September, they will be looking to Mr Powell above all else to calm the sense of panic that has persisted in bond markets in August.

The Jackson Hole symposium has become increasingly important in recent years. Two years ago, for instance, the spotlight was on Mario Draghi, the ECB president, ahead of an expected winding-back of the bank’s asset purchases.

Three years earlier, in 2014, Mr Draghi captured the headlines by laying the groundwork for those purchases. Two years before that, in 2012, Mr Powell’s predecessor-but-one, Ben Bernanke, signalled asset purchases – Quantitative Easing in the jargon – by the Fed itself.

What we won’t see this time around – even though Mr Powell must yearn to say it – is that it is the US president himself who has sowed all this economic uncertainty, with all his protectionism and tariffs, making it a little rich for him to blame the Fed for the slowdown.

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