Despite the chaos of the Trump administration, prices have reached the Fed’s target. The announced “tapering” is complicated because if the central bank is not careful rates could shoot up more than necessary.
Since January 20, the largest economy on the planet is living a permanent April Fool’s Day. This is thanks to a president who is capable of spending three hours on a Monday morning watching the TV programme ‘Fox and Friends’ and twitting about it. Although as far as April Fool jokes go, nobody did it better than Treasury secretary, Steven Mnuchin. Known less than seven years ago as “the king of evictions” thanks to his management model for the Californian bank IndyMac. Mnuchin said that Trump “has perfect genes”.
What Mnuchin’s statement reveals, above all, is the chaos in Donald Trump’s goverment. A chaos which has also extended to economic policy. To such an extent that, up to now, the US has not made any changes to this. Obamanomics is still fully functioning. The private consumption deflator reached an interanual rate of 2.1% in February, according to official data published on March 31. This is the first time in five years that this indicator has reached 2%. And this is important, because the Fed’s medium-term inflation target is 2%. But not 2% of the CPI, but of the private consumption deflator. This means that prices have reached the Fed’s target. So it’s not surprising that three days later the central bank put forward the idea that at end-year it will start to sell the over 2 billion dollars it has accumulated during the successive waves of “quantative easing” since 2008.
The arrival at 2% of the deflator means that the US economy is, really, normalised. Possibly thanks to Trump because he has not done anything apart from eliminating enviromental regulations. A measure which is not going to have any economic impact because it’s going to be brought before the courts immediately. And because the main sector to benefit from it, where coal is used to generate electricity, is suffering a structural crisis due to automation and the fracking ‘boom’ and to horizonal drilling for hydrocarbons.
While Trump’s economic policy is going nowhere, the Fed has already begun to transmit the message about the sale of its bonds. It will be a complicated operation, because if the Fed is not careful interest rates could shoot up more than is necessary. Its complexity will be even greater because the operation is going to be designed by Janet Yellen, the first democrat to head up the central bank since 1986, but it will be put into practice by her successor. And the fact is that since the US central bank’s independence became an important element of economic policy, under Jimmy Carter’s presidency, US presidents have allowed the Fed chair to be re-elected once, even though he/she didn’t belong to their party.
Reagan did it with the democrat Paul Volcker, and Clinton and Obama with the republican Ben Bernanke. Obviously, such niceties don’t go down well with Trump, who has already actively and passively stated his intention of replacing Yellen with a republican. And, possibly, with a republican without any experience in monetary policy, but, more likely, in business. This is Nobel prize winner Robert Schiller’s bet. Schiller is from Yale University and author of the famouse Case-Schiller Index for US housing prices.
Can anyone imagine what a Fed directed by a business man would be like? Perhaps it would be like the State Department, or the Trade Department or the Treasury being directed by businessmen, which is the case now: chaos. The problem is that the central bank cannot have an irrelevant role, as is happening with these government departments, so the fun is guaranteed. With Donald Trump, the US is governed by the court of miracles. And, as such, goes from one miracle to another. Long may it last.