Is a recession imminent? That is the talk in financial markets, even among some monetary policy experts who believe the Federal Reserve needs to act right away to keep the United States from slipping into a downturn. While there are some weaknesses in the economy, particularly manufacturing, it is unlikely that the United States will experience a contraction. Why? The Federal Reserve is still printing vast amounts of money, and it is likely that the Fed will continue to keep pushing the button as it cuts interest rates and acquires Treasuries. But one former Fed head is so worried about the R-word that he is willing to forgo regime change just to stave off the inevitable demise of this decade-long expansion.
Bill Dudley’s Regime-Change War
Politicians are not the exclusive holders of the flip-flop patent. It turns out that ex-Fed heads can receive royalties for embracing this behavior, too.
What a difference a couple of months has made for former New York Federal Reserve Bank President William Dudley. In August, he wrote in an op-ed for Bloomberg News that the U.S. central bank should not enable President Donald Trump and his administration by refusing to tailor monetary policy to the White House’s whims. Otherwise, he opined, the Fed risks getting Trump re-elected in 2020.
The op-ed triggered enormous controversy as it suggested that Dudley might be encouraging the Fed to purposely sabotage the administration and the president’s chances next year. Even the central bank had to go into damage control, issuing a statement that Dudley no longer works for the Fed and the central bank is an independent institution.
In a recent opinion piece for Bloomberg, Dudley somewhat changed his tune and suggested that the Eccles Building should “take out some insurance against a recession” and prevent the U.S. economy from hitting “stall speed.” He wrote:
“People shouldn’t be as worried as they are about the risk of a U.S. recession. That said, it wouldn’t take much to trigger one, which is why the Federal Reserve should take out some insurance by providing added stimulus this week.”
Dudley conceded that the consumer remains strong, and the Fed’s latest rate reductions have facilitated sound financial conditions. However, he does believe that a shock to the system, as well as human psychology, could reverse this bull market.
Hunt for the FOMC October
The Federal Open Market Committee (FOMC) holds its second-last policy meeting this week. According to the CME Group FedWatch tool, it is widely expected that the central bank will pull the trigger on another rate cut, the third in 2019. This would lower the target range to 1.50% and 1.75%, which would be the lowest federal funds rate in more than a year.
What is interesting, though, is that a growing segment of the market is penciling in one more rate reduction at the December FOMC powwow. This is noteworthy because the Fed’s dot-plot last month suggested board members were anticipating a total of three this year.
Despite the apparent easing by the doves occupying the Eccles Building, the president is still unhappy. Judging by his latest tweets on the matter, Trump wants the Fed to emulate countries around the world and introduce subzero rates, writing:
“The Federal Reserve is derelict in its duties if it doesn’t lower the Rate and even, ideally, stimulate. Take a look around the World at our competitors. Germany and others are actually GETTING PAID to borrow money. Fed was way too fast to raise, and way too slow to cut!”
While the Fed has reignited quantitative easing (just don’t call it QE!), why the Fed would flirt with mirroring the European Central Bank (ECB) and any other central bank for that matter is befuddling. Their unconventional monetary policies have done nothing to stimulate the economy and spur growth. Europe is anemic, Japan is facing a recession, China is crumbling, the Swiss National Bank (SNB) is ready to ease further, and Canada and England are waiting.
So, Trump is getting what he wants – lower rates, bond-buying, and a Fed willing to spring into action to either prevent further cooling or remedy a crash. It just is not fast enough for the president.
Deep State Dudley
When Dudley originally wrote his op-ed this past summer, it showcased to monetary neophytes just how influential the Fed can be. Throughout history, Fed chairmen have partnered with administrations to facilitate government spending, grow the economy through manipulation and malinvestment, and conceal underlying weaknesses. Because the central banking system is so immense and interventionist, the Fed is the most powerful institution in the world. Contrary to public opinion, it is a political organization. As Dudley insinuated, if the chief Swamp monster does not like you, then be prepared to face its wrath.