Stock Talk - Pres. Trump vs. Fed Chair Jerome Powell: Interest Rate Smackdown

Starting point is 00:00:00 Okay, investors, the title this week, Interest Rates Smackdown, President of Donald Trump versus Federal Reserve Chairman Jerome Powell, who's right on interest rates? Investors, this shows my age. On the Lost Generation X, we grew up with both Ronald Reagan as president and the rapid emergence of the WWF. The World Wrestling Federation is Entertainment with Hulk Hogan, Andre the Giant, Randy Savage, and the nature boy Rick Flair. Rocking to prominence.

Starting point is 00:00:26 For those not familiar with the WWF in wrestling and who are, bigger boxing fans, I probably should have titled this one, let's get ready to rumble, the famous opening line used by ring announcer Michael Buffer, who was also the exclusive ring announcer for President Trump casinos when they hosted boxing matches. This week, we aren't discussing stocks in the stock market directly. No investors, we're going to focus on the bond market, and more importantly, their direction of interest rates that the Federal Reserve X programs like QE has control over. Those are shorter term interest rates. Many will ask about interest rates and focus on the Fed actions.

Starting point is 00:01:04 More seasoned investors understand that the markets and investors ultimately control the level of most interest rates. The Federal Reserve sets the federal funds rate. What's this rate? It's the interest rate at which depository institutions, those are mainly banks, lend reserve balances to other institutions, usually banks, at an overnight rate on an uncollarized basis. Basically, it's the rate banks charge each other for short-term loans. time and time again on TV, we hear many commentators talk about the Fed Fund's future, which is the market's guesstimate about what direction, when, and by how much the Federal Reserve

Starting point is 00:01:38 will change this rate in the future. As we've discussed for years at O'Carvis, historical data suggests that tracking, discussing, and worry about the Fed funds futures is meaningless and unpredictable when it comes to predicting anything the Fed does outside of the five to seven-day window preceding each Fed meeting. Investors, in other words, the Federal's historically has almost no real idea where they'll be setting interest rates out months or quarters in the future, let alone years. And yes, investors, the Fed is generally a momentum investor. Rate cuts lead to more rate cuts. Interestrate increases? Well, they lead to more increases. So to hear in the now, on Thursday, May 29th, President Donald Trump called Federal Reserve

Starting point is 00:02:20 Chairman Jerome Powell to the White House for their first face-to-face meeting since the president retook office in January. So the President Trump told Chairman Powell that he thought Powell was making a mistake by not lowering interest rates. Should investors be surprised that the President Trump's actions and opinions? No, certainly not. Why? Because every president, whether they're a Democrat or Republican, wants the Fed to lower interest rates. Every president in office wants as an ally in the Fed the tailwind of lower interest rates to help push forward the economy, to help better their own agenda, lower rates, and looser money. Easier for business to get credit at the bank and cheaper to invest. Generally, it's easier for consumers to get loans from banks and buy houses and cars.

Starting point is 00:03:06 Investors' consumption and services are still nearly 75% of the U.S. economy. Most individuals and businesses ex-banks themselves like low interest rates or lower trending interest rates. Post this meeting, the Federal Reserve released a statement stating that the FOMC will set monetary as required by law to support maximum employment and stable prices. They went on to say that their decisions will be based solely on careful, objective, and non-political analysis. Okay, fine. We know the players, we know their goals, the mandates, the objectives, and desires political or not. But who's right right now? Is the president right? And is the Fed too tight?

Starting point is 00:03:48 Should the Fed be cutting rates? Or is the Fed right by holding pat concerned over Trump administration tariff policies, and their effect on future inflation. Okay, investors, let's check the tapes and data and come to our own conclusion. First, let's check the tapes over the last 10 years. Who has a better track record at predicting the economy, and if rates are too high, the Fed is too restrictive and if rates should be dropping? Quick flashback to a similar time period in the second half of 2018 during Donald Trump's first term.

Starting point is 00:04:18 Post the 2017 Trump tax cut and deuce sugar high in the markets and economy, the Fed went on an aggressive interest rate increase policy. Then, in early fourth quarter of 2018, the president went on an attack, publicly criticizing the Fed for its rate increases. The president, being his direct and unfiltered self, called the Federal Reserve crazy and loco, and said it's gone wild with interest rate hikes. He went on to blame the central bank for the sharp decline in a stock market in mid-October 2018.

Starting point is 00:04:48 To remind investors, here's a chart of S&P 500 from Trump's first term, including the central. the historic near-linear low-volatility straight lineup in 2017, followed by a series of shark corrections to start 2018 when the president flipped policies to focus on tariffs in China as an adversary. The market's late 2018 sell-off was almost exactly minus 20 percent into the Christmas Eve low after the Fed raised rates again on December 18th, while the economy was already slowing and softening into year-end. As it turns out back then, the president was correct. The economy was slowing, and only a few weeks after the Fed raised rates in mid-December of 2018. In early 2019, the Fed had to quickly switch their gain plan.

Starting point is 00:05:32 Partly due to the impact of the administration's trade war, combined with the effect of higher interest rates, the economy slowed. And Powell and the Federal Reserve quickly had to pivot away from tightening. Eventually, the Federal Reserve cut rates three times in 2019. In July, in September, and in October to offset the negative economic impacts of both the Fed. rate hikes in the prior year and the trade policy of the Trump administration. So I have to give round one of the bout of the Smackdown and the fight to President Trump. His verbiage was a bit rough for my liking, but it turns out, yes, the Fed was too tight back in 2018 for the economic circumstances back then.

Starting point is 00:06:11 Okay, so let's fast forward to today. Is the president right again about monetary policy? Is the Fed too tight? Are the Fed and all the economists too worried about inflation induced by Trump's tariff Tupidot-0 and not worried enough about the economic slowdown it's causing. Should the Fed be more anticipatory, kind of like their 50 basis point rate cut move in front of the election last year in 2024 in 2024 in 2024. The Fed is currently holding its target rate range at Fed funds rate 4.5%? Is this too tight? Is the president right again about interest rates? Followers know I'm a

Starting point is 00:06:45 stickler for real-time market data, tradable data, or market-based data trends. I hate consumer surveys like the Michigan's consumer sentiment or inflation expectation surveys that can be manipulated, tend to be surveyed emotionally charged individuals, and historically are not predictive at all in the future. But real-time data says, yes, the president has a better handle on where the economy is going and where interest rates should go. Yes, some of this is induced by his own policies, but the Fed is supposed to react to the hand they were given, regardless of who's in office. investors, real-time data says inflation peaked in March of 2022, three months before the Fed started raising rates, and it's been in a steady downtrend for the last three years. Pick a maturity for inflation break-evens in the bond market.

Starting point is 00:07:34 One year, three-year, five years, ten, or even 30. They have all trended lower for the last three years. They all peaked seasonally as they tend to do in late March or early April, and they're all, once again, heading lower. 30-year, 2.3%. 10-year, 2.33. 5-year, 2.4, but one-year, 2.8. The five-year, five-year forward is about 2.3%. Yes, investors, all those levels are above the Fed's 2% goal, and yes, the shorter-term one-year rate is the highest at near 2.85%. But you would expect the tariff price shocks to hit a bit short-term. But are they out of control like they were in

Starting point is 00:08:12 2022, post-COVID Fed and Biden-induced economic consumption-led sugar high? No. Here's the jiggy and the fast-twitch one-year break-even inflation rate for the last 10 years. Sure enough, it reached its zenith in March of 2022 at around 6.35 percent, steadily declining into the summer of last year, the Biden-IRA economic spending, and a rapidly rising again after Trump election, yet peaking in March of 2025 with Trump tariff top. Okay, you want something longer term looking beyond one year, something that looks past this president, maybe to the next one or two. Maybe to see if this administration's tariff policy is ushering in that period of stagflation. That terrifying word that keeps getting thrown around on TV by many doomers who seem to have been wrong for 15 years in counting on the stock markets.

Starting point is 00:09:02 Who has been repeatedly wrong, calling almost annually for recessions over the last 10 years. Okay, let's look at the 10-year inflation break-even rates. Right now, they said about 2.32%. Here's a 20-year chart of those rates. Let this chart sink in a bit. Of the last 20 years during periods when the Fed was mostly fearing deflation and worried that there wasn't enough inflation

Starting point is 00:09:23 in the economy, rates almost never dropped below 1.6%. Meanwhile, throughout 2006-through 2013 period, this race also reached 2 and 3 quarters percent. For the better part of the last 20 years, this rate has fluctuated between 1.6 and two and three quarters percent. Right now, we're closer to the high side of that bound, but it's trending lower, not higher, since its peak in March of 2022. Investors, most large central banks around the world are cutting rates already. They have been since 2024. Canada

Starting point is 00:09:57 seems to always be the first this cycle, and they started the parade last year. Here's the table from Reuters with data from the LSEG. The U.S. has been on one of the slowest paths of rate cuts and remains one of the most restrictive monetary policies in the world. How restrictive, another chart from Reuters shows the Fed funds rate versus both RCPI and core CPI, two metrics the Fed watches. Looking at this chart, the Fed funds rate is anywhere from 125 to 150 basis points higher than the U.S. inflation rate, which is trending lower and hasn't been over 4% since early 2023. Investors, in my book, the Fed is too tight, they have room to cut now and should.

Starting point is 00:10:37 inflation will continue coming down while the economy slows throughout 2025, regardless of the one-year, one-time effects of tariffs. Have you looked at housing pricing and demand? Yes, prices are high, but the housing market is now favoring buyers over sellers. Price cuts are abundant in almost every housing market I can find aimed at enticing buyers. Airfarers will likely come down as leisure demand and the U.S. dries up for a bit. Deals at restaurants are picking up. Chili's led this charge about 12 to 18 months ago, and many are following.

Starting point is 00:11:10 Department rental rates look to be easing, and higher initial concessions are being given to renters in many large cities across the U.S. just as job hopping that take this job and shove it index is slowing, and new multifamily units are hitting the market. Investors, I have to say, the way did the evidence for the second act of the Trump v. Powell looks also to be in favor of the president. In my analysis, the weight of evidence suggests the Fed's monetary policy is too tight, whether they are being political, too academic in their line of thinking, or just too slow and reactionary.

Starting point is 00:11:44 I don't know, but on this subject, should the Fed restart cutting rate sooner or not later, I'll place my vote in the President's camp. Let's restart the Fed cuts and keep this economic expansion going slow and steady for a few more years. Investors, regardless of what the Fed does on interest rates over the coming months, or whether a more public fight breaks out again between President and Powell, the investment team at Oak Harvest, will be here, crewing the ship and adjusting our models where we can. Until next week, have a blessed weekend and know that Oak Harvest team is doing what we can to plan for you and your family's future, regardless of what stage you're at, in your career

Starting point is 00:12:21 or in your retirement. All content contained with an Oak Harvest podcast expresses the views of the speaker and is for informational purposes only. It is based on information believed to be reliable when created, but any cited data, indicators, statistics, or other sources are not guaranteed. The views and opinions expressed herein may change without notice. Strategies and ideas discussed may not be right for you, and nothing in this podcast should be considered as personalized investment, tax or legal advice, or an offer or solicitation to

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Stock Talk - Pres. Trump vs. Fed Chair Jerome Powell: Interest Rate Smackdown

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