Why Donald Trump will finally have his way on rates?
It is by now a well known fact that Donald Trump has been a staunch critic of the rate hikes announced by the Fed. In the latest Fed testimony, Chairman Powell hinted at further rate hikes if the growth in GDP and the strong jobs data persisted. While there will be a lot of serious discussions when the global central bankers meet at Jackson Hole in Wyoming, a rate hike of 25 bps in September almost looks like a done deal. However, beyond September, it is not going to be easy to keep hiking rates. There are some specific reasons why Trump wants an end to rate hikes.
Playing the dollar trade game
The trade war is literally on in full steam with both the US and China unwilling to relent. The big plan for Trump is to isolate China by loosening the trade tariffs on other nations. But that would require a logical conclusion. And that logical conclusion will come from a US push to exports. Trump knows pretty well that if he has to capitalize on the trade war then US really needs a weaker dollar. This will enable their local manufacturers to export their way out of trouble. There is already an impact of the trade war on US business and Trump will actually require lower rates of borrowing locally to keep the businesses happy. A series of rate hikes means greater flows into the US and a stronger dollar. A weaker dollar could be Trump’s big bet to quickly narrow the widening trade deficit with China.
Government needs to borrow
The US government has an aggressive borrowing program and that is likely to succeed only if backed by lower rates. A runaway rise in interest rates will make the borrowing program for the US unnecessarily expensive. That is not something Trump would want especially when he is seriously looking at a second term in 2020. But the biggest reason why Trump wants lower rates has more to do with the private businesses. Here is why it matters!
What about corporate debt?
That is actually the trillion dollar question for the US economy. In the last 10 years, the shale oil boom was largely driven by huge investments funded by borrowing at dirt cheap rates. The US cannot really afford higher rates at this point of time. Secondly, since 2011, the total debt issued by (below AAA grade) companies has gone up by 120%. That entire family of middle level debt could come into trouble if interest rates start going up. That only means that bonds that were issued to fund the capital investments by US corporates may come under a cloud and prices may start falling. If that happens then it could have a spiral effect on US business. That is exactly what Trump and his business lobby is worried about. Like in previous cases, Trump may end up having his way on rates and that could be good news for EMs!
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