How tRump Has Kept His 2% Economy Humming
Investors will watch the Federal Reserve’s monetary policy committee meeting closely on Wednesday for the faintest wisp of information on the central bank’s plans to pare back its recent round of Treasury security purchases.
Since October, when it began to buy Treasury bills, the Fed has pumped $60 billion in fresh money into the world’s financial markets each month. Policymakers have said that buying will continue “at least into” the second quarter of 2020, but the pace of those purchases and how quickly they will slow remains a wild card.
“Balance Sheet Bounceback
The Fed’s Treasury bill buying and repurchase operations have combined to boost its holdings.
$4.4t
4.2t
4t
3.8t
$4.1 trillion
April
July
Oct.
2018
April
July
Oct.
2019
April
July
Oct.
2020
Source: Federal Reserve”
Trump is the first since President Lyndon B. Johnson in the mid-1960s to run an aggressive, year-long campaign to demonize his hand-selected central banker. Past presidents have pushed their Fed chairs when the economy was in the dumps, facing high inflation, unemployment or both. But today, unemployment is near an all-time low, and inflation is below the Fed’s 2 percent target.
Here’s the issue: Trump’s trade war — particularly his on-again, off-again tariffs — has dented business confidence and has pushed some of the economy into a recession.
Trump wants a roaring economy to help secure his reelection. Like most politicians, he is blaming the Fed for anything short of a boom. So the rising risks of recession threaten his reelection. That’s especially problematic for Trump, since his public approval has never cracked 50 percent.
The Fed began snapping up securities after a tumultuous episode in money markets last year. The central bank had just stopped shrinking its holdings of Treasury securities when, in September, a key short-term rate jumped out of whack. Banks were holding onto their cash and reluctant to lend to their peers — a sign that the Fed had gone too far.
Since then, officials have been pumping cash into the market for short-term loans between banks, called repurchase agreements or “repos,” to keep the market functioning smoothly. While that effort is temporary, bill purchases are a longer-lived fix. The two programs added about $400 billion to the central bank’s holdings in the second half of 2019.
As the Fed prepares to tiptoe away from bill-buying in particular, it is creating a tense moment for Wall Street. Stock prices have risen on the back of the purchases, and analysts warn that the gains could fade as buying slows.
“That will take away some of the fuel that has probably been able to help the markets out,” said Joseph Kalish, chief global macro strategist at Ned Davis Research, a market research firm.
Chair Jerome H. Powell is widely expected to field questions about the Fed’s plans at a news conference after its two-day policy meeting on Wednesday. The meeting itself is expected to produce little drama — the Fed is likely to leave rates unchanged — but Mr. Powell’s comments about the purchases could generate headlines and roil markets.
Fed officials took pains to clarify from the start that the Treasury bill purchases were simply a technical fix aimed at lifting the amount of bank reserves in the financial system. The multibillion-dollar effort was not, they insisted, the same as the “quantitative easing” bond-buying programs it periodically undertook after the financial crisis to aid economic growth.
Nobody in financial markets cared what it was called. To them, it was a reason to buy stocks.
“The market doesn’t really discriminate between what’s causing the balance sheet to expand,” said Ed Yardeni, president of Yardeni Research, an investment strategy consulting firm. “If it’s expanding, it’s bullish.”
Some economists doubt the merits of that explanation. (The gains also coincided with an easing of trade tensions between the United States and China.)
But there is a widespread narrative that the program is helping stocks, which makes any signal about its future crucial for investors.
“It’s about how he delivers the message,” said Seth Carpenter, chief United States economist at UBS. “They have a decided incentive to give as much guidance as they can, just to set expectations early.”
The S&P 500 is up roughly 10 percent since the Fed’s Oct. 11 announcement — a climb that was remarkably steady before an outbreak of the coronavirus in China set off a recent return of volatility.
The purchases were among the Fed’s actions that helped drive outsize returns across financial markets last year.
After raising rates four times in 2018, Mr. Powell’s central bank suddenly swiveled away from plans for further increases in the face of tumbling stock markets, signs of global economic weakness and tepid inflation.
The Fed instead ended up cutting rates three times last year, moves widely credited as a key driver of the stock market’s 28.9 percent gain.
But if recent history is any guide, the growth of the Fed’s balance sheet could have played an important, if less transparent, role in the rally of virtually every financial market last year.
Institutionally, the Fed is insulated from the rest of the government. Its funds come not from Congress but from its own operations; Fed governors have extraordinary long terms; and so forth.
But as the most important economic policymaker in the world, the Fed faces pressures from presidents, lawmakers, the public and global markets. Trump’s attacks raise existential questions: How can (and should) the Fed balance competing political pressures against what central bankers see as the right monetary policy choices?