The Donald vs. The Fed

Don’t fight the Fed.

If you’re an investor, you’ve no doubt heard that phrase somewhere. It’s a simple mantra: If the Fed says X, then you invest according to X. If the Fed says Y, you invest according to Y.

And if you’re Donald Trump… you don’t give two shakes of a rat’s rump what the Fed says.

You demand what you want.

And in this case, the Donald wants the Fed to cut interest rates.

Which puts us in the predicament we’re in at the moment, in which investors play the role of the dazed and confused, uncertain of what’s to come and how to invest for whatever’s next.

On one hand… the US economy is not all that it’s cracked up to be.

On the other hand… inflation is not dead, despite the Fed’s best efforts.

On the third hand… at $100 trillion, America’s combined debt at the governmental, corporate, and personal level basically equals the entire global economic output. An insanely high quantity of IOUs.

And on the fourth hand…  the Fed is hamstrung—caught between Scylla and Charybdis, confronting equally unpleasant alternatives, none of which are avoidable, regardless of the path taken from here.

Let’s break this down…

Hand One: Sure, the economy appears decently robust on the surface. In the last six quarters (back to the second half of 2023), the economy grew each quarter by between 1.5% and just over 4%.

As the Bureau of Economic Affairs put it in their most recent Q4 GDP announcement, “The increase in real GDP in the fourth quarter primarily reflected increases in consumer spending and government spending.”

Then again, recent data from the Federal Reserve shows that the consumers who are driving the spending are the upper-income families with earnings exceeding $153,000 per year. Those lower on the income ladder are actually surviving by assuming increasing amounts of debt… and apparently they’re struggling to pay that debt, witnessed by the fact that the number of credit-card accounts making just the minimum payment is now at a 12-year high.

Hand Two: Inflation is pushing back up and is now above 3% again. But if you were to annualize the most recent reading in January, then inflation is running at 6%. That’s a one-month window, of course, and it doesn’t necessarily speak to the coming year as a whole, but it does say that inflation remains a burr in the Fed’s posterior.

Historically, the Fed would just raise interest rates until inflation was six feet under.

But along that path lie two formidable problems:

1. Donald Trump, who’s clearly ready to rumble with the Fed to get his way, or maybe foment an economic crisis to get his way.

• Hand Three.

Hand Three: With so much debt, the Fed cannot raise interest rates without causing severe knock-on effects.

Higher rates would:

1. Cause the federal government’s borrowing costs and annual interest payments on the debt to surge even higher. Already, the global bond market is not happy with America’s debt addiction, and every bit of increased worry would cause US bond prices to fall even farther, pushing up market interest rates… which then flows back through US borrowing costs.

2. Knee-cap corporate profits, because the cost of debt would rise. Wall Street would be displeased with shrinking corporate profits. Companies would, thus, compensate by axing workers and curtailing research and development. And that would flow through the economy in the form of reduced consumer and corporate spending.

3. Slam American households. As noted in Hand One, the American consumer class is not monolithic. Upper-income families can spend, while lower-income families work two and three jobs to survive. Higher interest rates would push up credit-card minimum payments, as well as housing costs, among other expenses. Add inflation on top of that, and suddenly the average American household is screaming some spicy language about their inability to get ahead…

I have to imagine Trump knows and understands all of this to some degree.

He particularly knows that falling corporate profits would lead to falling stock prices, which he abhors because he keeps presidential score by how well Wall Street does.

Hand Four: Scylla and Charybdis are nasty and hateful—just ask the mythical Greek sailors who had to battle them.

What does the Fed do?

It sits on its hands for the time being and it awaits a Trump-inspired crisis. And to be clear, I am not using “Trump crisis” negatively. Trump wants a crisis. He thrives on crisis because it allows him to demonize others, to “rescue” America, and to push for what he most desires: lower interest rates globally.

The wholesale firing of federal workers and the random cancelling of government contracts (which leads to layoffs and bankruptcies across private-sector businesses) will start hitting the US economy soon enough.

I expect we will see hints of this in the March unemployment report that lands in April.

At that point, the Fed will have cover to lower interest rates, appeasing Trump and sending asset prices higher. The bond market will be less stressed because US borrowing costs will begin to retreat a bit.

Of course, that just means the reckoning arrives later…

But we do have a silver lining here.

Lower rates will pump up asset prices—at least for a while.

So hold tight for a few months, just like the Fed.

And put any spare cash to work in bitcoin (a bargain right now) and gold (approaching record highs, but certain to fly higher as the reckoning approaches).

I guess what I’m saying is: Don’t fight the Fed. It’s sitting on its hands right now and biding its time, and we should too.