Toxic Mix Of Politics And Policy


It's official: We've moved into another dimension.

For many years, a hallmark of the U.S. has been a strong, independent and apolitical central bank, even when it did not fit the policy hopes of the executive branch.

Even with the fits and starts that accompanied the early-stage recovery from the financial crisis, no one called the Fed chair an enemy of the state.

In many ways, our challenges today are quite modest compared to those faced 70 years ago, but the need for true leadership remains the same.

By Joseph V. Amato

It's official: We've moved into another dimension.

As I finish up my summer reading list, I'm working through a terrific new biography of General George Marshall, the U.S. Army chief of staff during WWII and the subsequent secretary of state. His Marshall Plan was one of the great public and economic policy initiatives of the past century. I long for such leadership today.

Consider the rhetoric around the Federal Reserve, where leaders across the political spectrum have been breaking longstanding convention in seeking to influence decision-making.

For many years, a hallmark of the U.S. has been a strong, independent and apolitical central bank, even when it did not fit the policy hopes of the executive branch.

Back in the early '80s, Paul Volcker was focused on the extremely difficult and important task of taming runaway inflation, lifting interest rates aggressively even as President Ronald Reagan advocated sweeping tax cuts. Despite living through a brutal recession, you did not hear the president call out the central bank chair or call him names, because he understood the mission of the Fed and the importance of its independence.

More recently, Ben Bernanke worked in close cooperation with the Bush and, later, Obama administrations to steer a way out of the '08 financial crisis - a strong, constructive relationship that continued with his successor, Janet Yellen. Even with the fits and starts that accompanied the early-stage recovery from the financial crisis, no one called the Fed chair an enemy of the state.

Those precedents are out the window in today's climate. Neck-deep in the China-U.S. trade conflict and escalating tariff countermeasures, the current president has been intensely and repeatedly critical of Fed Chair Jerome Powell, calling on him to cut rates and reintroduce quantitative easing to support the economy. When, at Jackson Hole, Powell talked about accommodation but failed to promise aggressive rate reductions, Trump erupted on Twitter, asking whether Powell was a greater "enemy" to the U.S. than China's President Xi.

This, of course, came on the same day that China responded to escalating U.S. tariff threats by introducing levies on an additional $75 billion in U.S. goods, after which the president told companies doing business in China to move elsewhere with his absurd "I hereby order" tweet.

New Reality

It should be noted that many believe the Fed made a mistake in raising rates back in December, and has been too slow to ease in response to global pressures this year. And you could argue that Trump rightly pointed out the error and has simply been advocating for a corrective course, albeit in typically over-the-top fashion.

Indeed, many of us have grown accustomed to discounting the vitriol of today's political discourse, and White House aides repeatedly reassure the public that such comments are not to be taken too literally. However, I think it's important to note just how far we've moved away from traditional norms that helped support the credibility of our institutions and allowed the government to make progress in achieving important goals.

This goes for substance as well as rhetoric. A few decades ago, it was quite common for governments to wield interest rates as a short-term economic cudgel, even if the long-term ramifications were currency devaluation and excessive inflation. Gradually, the consensus moved toward greater autonomy for central banks, even if guided at a high level by political views. There are exceptions, and they tend not to be rewarded in the markets, as Turkish President Recep Tayyip Erdogan found out earlier this summer when he sacked his central bank governor and investors ran for the exits. Trump's current tactics obviously don't reach that extreme, at least not yet, but they are disconcerting nonetheless.

Making Matters Worse

This political tit-for-tat is, surprisingly, pulling in some nontraditional voices. Last week, former New York Fed President Bill Dudley argued, somewhat shockingly, not only that the Fed should refuse to "play along" with the president's trade war by cutting rates, but that the central bank should consider the 2020 political impact of its actions in light of the danger he believes Trump poses to the economy.

Obviously, the latter argument runs contrary to the apolitical tradition of the Fed, and does the central bank an enormous disservice by potentially reinforcing to some the notion that anti-Trump bias could be driving policy. Dudley was roundly, and justifiably, criticized, and hopefully we won't hear these arguments again.

The Path Ahead

Is there a way out of this mess, a path back to a more normal dimension? First, saner heads need to prevail; those who would like to add to the cacophony should think before they speak, write or tweet. Second, politicians should leave the Fed alone to do its job. The Fed, for its part, needs to remain independent, and do what's right in relation to its mandate.

Ultimately it's about leadership, from an independent Fed and the executive branch of the U.S. government, and from others who can influence current debate and seek innovative, constructive solutions in a conflict-riven geopolitical environment. George Marshall's actions were instrumental in rebuilding Europe and establishing a world order that encouraged growth and democracy for decades. In many ways, our challenges today are quite modest compared to those faced 70 years ago, but the need for true leadership remains the same.

In Case You Missed It

  • U.S. Durable Goods Orders: +2.1% in July (excluding transportation, durable goods orders decreased 0.4%)

  • S&P Case-Shiller Home Price Index: June home prices +0.3% month-over-month and +2.1% year-over-year (NYSE:NSA); unchanged month-over-month (NYSE:SA)

  • U.S. Consumer Confidence: -0.7 to 135.1 in August

  • U.S. 2Q 2019 GDP (Second Estimate): +2.0% annualized rate

  • U.S. Personal Income and Outlays: Personal spending increased 0.6%, income increased 0.1%, and the savings rate decreased to 7.7% in July

  • Euro Zone Consumer Price Index: +1.0% year-over-year in August

What to Watch For

  • Monday, 9/2:

    • China Purchasing Managers' Index

    • Japan Purchasing Managers' Index

  • Tuesday, 9/3:

    • ISM Manufacturing Index

  • Thursday, 9/5:

    • ISM Non-Manufacturing Index

  • Friday, 9/6:

    • U.S. Employment Report

    • Euro Zone 2Q 2019 GDP (Final Estimate)

- Andrew White, Investment Strategy Group

Statistics on the Current State of the Market - as of August 30, 2019

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S&P/LSTA U.S. Leveraged Loan 100 Index




ICE BofA Merrill Lynch U.S. High Yield Index




ICE BofA Merrill Lynch Global High Yield Index




JP Morgan EMBI Global Diversified Index




JP Morgan GBI-EM Global Diversified Index




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Source: FactSet, Neuberger Berman.

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