Here’s What Disaster Looks Like

We have a winner!

Which, unfortunately, means American households are about to become losers.

The winner is Kevin Hassett, Prez DJ Trump’s nominee to replace Jerome Powell as chief bottle washer at the Federal Reserve.

Powell is many things, including wrong, particularly when it comes to supposedly transitory inflation. But he is decidedly not a Trump toady. He’s a data guy who looks at the numbers… before making bad decisions. Still, he’s independent, which is what the world wants in a Fed interest-rate wrangler.

Hassett… as servile as they come.

He has already made clear—and abundantly so—that America needs Donald Trump interest rates, which really means uber-low rates of 1%.

Certainly, there’s an argument to be made for lower rates as the US economy finds itself in a funky moment. Jobs are collapsing, consumers have never been as pessimistic as they are now, and business bankruptcies are surging.

That screams “lower the interest rate already, ya’ bunch of goombahs!”

Then again, the goombahs have a solid point too: Inflation continues to befuddle America like a laser pointer befuddling a kitten. The Personal Consumption Expenditures price index, the so-called PCE that the Fed relies on as its benchmark for inflation, was 2.8% in September.

That was the latest reading because of the government shutdown and because the Trump admin has been veerrrry slooooww to release any econ data, taking its own sweet time to properly massage those numbers until the negative kinks become nice and more positive.

No matter the massaging, real world data collected are abundantly clear that inflation’s still skulking about. The “Nowcast” from the Cleveland Federal Reserve’s Center for Inflation Research projects core PCE to hit 2.96% for December, up from 2.78% in October, and well above the Fed 2% target.

That screams “raise rates, you sycophants, because lower rates are going to fuel even more inflation!!!”

So both sides have a point.

But the point that rates should be at 1% is, well, pointless.

And economically dopey.

Ultra-low rates encourage speculation since investors go hunting for return. Stocks are already at nose-bleed levels. Home prices are already 6x the average American family’s household income, and lower rates will only send that price higher while doing little if anything for family income.

Moreover, low rates help fuel inflation as more money flows through the economy.

So America will have tariffs, deportations, linger effects on Covid-warped supply chains, and uber-low interest rates all conspiring to make the daily cost of living pricier for American families.

Plus, America prolongs a severely strained asset bubble, ensuring that when it pops, the pain will be far, far worse for the entire economy.

But you know what?

None of that is the worst part.

There’s a much bigger Demogorgon on the hunt (sorry, I’ve started re-watching Stranger Things; Demogorgons are the early season’s bad hombres).

The worst part, as I mentioned in a previous dispatch many weeks back, are global perceptions that whoever Trump appoints, the global markets will see that person as a Trump stooge.

Meaning the Fed will have lost its much-vaunted independence.

Recent headlines now echo my original call:

Wall Street moves to stop Trump from picking Kevin Hassett as next Fed chief — here’s why – The New York Post

Trump Warned by Wall Street over Hassett as Fed Chair Pick – TipRanks.com

Hassett at the Fed helm could pressure the dollar, investors say – Reuters

The last thing America needs right now is a Fed chairman who carries the president’s water. Investors the world over will not react kindly to that, for reasons we’ll come to in just a moment.

First, I will note that Hassett on CBS News’ Face the Nation said that, “I would say 100% that monetary policy, Federal Reserve monetary policy, needs to be fully independent of political influence, including from President Trump.”

Or course, that’s like a monkey telling the plantation manager, “I would 100% say that monkeys should not eat bananas, not even the sweet, sweet ‘nanners we grow right here on the plantation.”

I imagine most Americans don’t really give any thoughts to Fed independence. Most don’t even realize the Fed isn’t a true government agency, but a hybrid beast that reports to the Congress on occasion, but which is owned by the 12 regional Federal Reserve banks, which are in turn owned by commercial banks across America.

Meaning, this whole notion of the Fed losing its independence is all a bunch of yawn-inducing blah blah.

Alas, loss of Fed independence is hugely problematic for the US dollar and for America’s need to sell so many boatloads of debt every year that it’s more rightly termed an armada of debt-laden super-tankers.

Here’s what that disaster looks like, and generally in the order of destruction that will happen if Hassett’s Fed does, in fact, push interest rates to Trumpian levels:

Immediate Market Reaction & Policy Shift

Loss of Credibility: The Fed would immediately lose its long-standing credibility and trust among investors and the public as a non-partisan guardian of the economy.

Market Volatility, Maybe Panic: Financial markets would likely experience significant volatility and initial panic due to the heightened uncertainty and the abandonment of data-driven, long-term decision-making in favor of short-term political goals from a president who always—always—operates with unspoken, ulterior motives.

Bond Market Turbulence: Bond investors would anticipate future inflation and would race to exit US government debt, particularly longer-dated bonds, causing interest rates to rip skyward, which would hit American consumers, businesses, and Uncle Sam.

Broader Economic Consequences

Higher Borrowing Costs: The spike in yields, particularly on bonds of 10 years and beyond, would drive up borrowing costs across the economy—mortgages, auto loans/leases, credit cards, business loans, etc. Ironic in that the whole purpose of cutting rates to 1% in the first place would be to stimulate the economy.

Rising Inflation Expectations: Businesses and workers would begin to build in expectations of higher, spiraling inflation. Workers would demand higher wages; business would reprice their goods and services much higher. Inflation runs wild in America.

Dollar Depreciation: The US dollar declines in value against other currencies as global investors lose faith in its stability and the US government’s economic management. Moreover, why own a low-rate currency of a highly indebted nation when you can own a currency of another nation that pays higher rates?

Long-Term Systemic Effects

Misallocation of Capital / Investment Uncertainty: The unpredictability of the US economy relative to the Fed’s kowtowing to political desires would undermine incentives for long-term private investment and hiring in the US.

Risk of Stagflation: The US economy already faces a stagflationary environment. This would worsen as rising inflation runs headlong into a stagnating economy.

Global Financial Instability: Instability in the US financial system, paired with a weakening dollar, would rip through the global financial system, potentially generating a broader international financial crisis since the greenback underpins so much of the global capital markets.

Geopolitical Power Shift: In the long term, the loss of trust and the economic instability could accelerate a shift in global power, undermining the US dollar’s status as the world’s primary reserve currency and weakening US influence.

But other than those 10 truly disastrous impacts, 1% interest rates are marvelous.