Markets are getting increasingly rattled by the difficulty of understanding what Donald Trump is likely to do next, but this should not have come as a surprise.
Trump’s great skill as a politician is his ability to convince so many people that he will be good for them, even though his policies are clearly contradictory, and there’s no sound reason for thinking that he’ll stick with the ones they particularly like. You struggle to pick out any consistent ideology other than a belief that the president’s power should be unchecked.
So we shouldn’t put too much weight on any forecasts for the next few years because they are even more guesswork than usual. Still, there is one big risk that we should not underprice: Trump forcing through a very large cut in interest rates.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Unusually consistent
It is entirely clear from Trump’s career that he will always favour lower interest rates – this is one of the rare situations where his comments and his conduct are almost always consistent.
After all, he does not fit the profile of anybody who believes in sound money. He is a real-estate developer with a history of borrowing as much as he can, and of filing business bankruptcy or getting debt forgiveness from lenders on several occasions.
Back in 2016, when first running as president, Trump accused the Fed of keeping rates too low to help Barack Obama, saying it had created a “false economy”. Once in power, that changed.
In 2018, after the central bank started to raise rates, he criticised it for moving too fast and called it his “biggest threat”.
This time, he said throughout his election campaign that rates should be lower, and he’s been stepping up that pressure since he got back in the White House.
Will the Fed cave under pressure?
The Fed is nominally independent but not immune to political pressure. It will cave in to this, just as it did in 2019.
The natural assumption is that the governors are moderately responsible, so they will give Trump lower rates, but not recklessly so (by their easy-money standards).
Yet, if the US economy starts to weaken and Trump’s approval ratings follow it down, it is very plausible that he will demand much deeper cuts.
The highest rates got in his last term was 2.5%, and much of the time, they were zero.
Would the current governors agree to that? That might not matter – Trump could try to replace them if they did not.
Fed chair Jerome Powell has said he won’t step down, and the president is not allowed to fire him. But given the approach that Trump is taking on other issues, I would take very little comfort in any legal arguments as to why he can’t replace the entire board with himself, Elon Musk or whoever else happens to be in favour.
If rates were cut aggressively, the usual tactic would be to hold long-term bonds (their price moves more for a given change in rates).
Yet, if Trump coerces the Fed, it could rattle markets even more, causing the yield curve to steepen.
I do not expect this to play out unless the US economy weakens severely, but it is another reason why our strategic portfolio holds only short-term bonds. Long-term yields are not high enough for this risk.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
-
Could falling interest rates be the motivation savers need to invest?Chancellor Rachel Reeves wants to spark an investment revolution. Falling interest rates could help her in her mission.
-
8 of the best properties for sale with shooting estatesThe best properties for sale with shooting estates – from an estate in a designated Dark Sky area in Ayrshire, Scotland, to a hunting estate in Tuscany with a wild boar, mouflon, deer and hare shoot
-
The most likely outcome of the AI boom is a big fallOpinion Like the dotcom boom of the late 1990s, AI is not paying off – despite huge investments being made in the hope of creating AI-based wealth
-
What we can learn from Britain’s "Dashing Dozen" stocksStocks that consistently outperform the market are clearly doing something right. What can we learn from the UK's top performers and which ones are still buys?
-
The rise of Robin Zeng: China’s billionaire battery kingRobin Zeng, a pioneer in EV batteries, is vying with Li Ka-shing for the title of Hong Kong’s richest person. He is typical of a new kind of tycoon in China
-
Europe’s forgotten equities offer value, growth and strong cash flowsOpinion Jonathon Regis, co-portfolio manager, Developed Markets UCITS Strategy, Lansdowne Partners, highlights forgotten equities he'd put his money in
-
How retail investors can gain exposure to Lloyd’s of LondonIt’s hard for retail investors to get in on the action at Lloyd’s of London. Here are some of the ways to gain exposure
-
The flaw in Terry Smith’s strategy at FundsmithOpinion Fundsmith has invested in some excellent companies, but it has struggled to decide when to sell, says Max King
-
The goal of business is not profit, but virtueOpinion Serve your customers well, and the profits will follow, according to a new book. It rarely works the other way around, says Stuart Watkins
-
How to invest in the travel industry's boom as tourists get back on the roadThe travel industry is in rude health despite uncertainty about the global economy, Trump’s policies and geopolitical concerns. Investors should buy in now
