Does politics factor into Fed decisions?

Timely insights from portfolio managers and industry experts on key financial, economic and political issues.

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Eaton Vance are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness.

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      By Eric Stein, CFACo-Director of Global Income, Eaton Vance Management and Andrew Szczurowski, CFAPortfolio Manager, Global Income Group, Eaton Vance Management

      Third in a three-part series

      Boston - At the Group of 20 (G20) summit in Japan, the U.S. and China agreed to resume trade talks, with both sides offering concessions. While this temporary cease-fire may cause the Federal Reserve to reverse recent signals that rate cuts could come soon, other factors, such as weakening economic data, could cause the Fed to follow through on cutting the fed funds rate later this month. The Advisory Blog recently sat down with Eaton Vance portfolio managers Eric Stein and Andrew Szczurowski to get their take on where Fed policy stands today - and what it means for markets and investors.

      President Trump has been a vocal critic of Fed Chairman Powell. How does political pressure influence what the Fed might do, if at all?

      Eric: First, I don't believe Powell will be fired. President Trump is not the first president to do this. George H.W. Bush blamed Alan Greenspan for a recession that elected Bill Clinton. "I reappointed him and he disappointed me," was the quote attributed to Bush 41 in Bob Woodward's book on Greenspan. In addition, President Lyndon B. Johnson was known to have tried to physically intimidate then Fed Chairman William McChesney Martin at LBJ's ranch in Texas to try and intimate him into running looser monetary policy.

      I do think Trump is changing the narrative. And you can argue he's been right. The Fed hasn't actually done anything since he's really gotten aggressive on it, other than hiking in December. However, from a rate perspective, it was projected to hike, then projected to be flat, now its projected to cut. They were shrinking their balance sheet, now it's all but stopped shrinking their balance sheet.

      So the Fed has gotten significantly more dovish. I'm not saying the Fed hiked in December because it wanted to push back against the pressure; I think it was trying to ignore it then. It's probably changed the narrative a bit, but the macro environment and the trade war have moved the Fed more than Trump's commentary has.

      I expect Trump to push back directly on the strength of the U.S. dollar. I expect a weaker dollar. Trump will still focus on the Fed, and the fed funds rate has a big impact on the dollar. It's not the only factor. I'd expect Trump to spend even more of his Twitter capital, if you will, on the dollar in addition to the Fed.

      Andrew: While Donald Trump may not be a traditional president, the one thing he has in common with almost every past president is that he would like interest rates to remain low. Trump does have a megaphone that most of his predecessors didn't have and that is Twitter. With Twitter, Trump is able to speak directly to his 62 million followers. Part of Trump's attacks on the Fed are for show, but the reality is Trump would like the economy to run hot going into the 2020 elections, and Trump sees the Fed hiking rates as an impediment to that.

      With that being said, I don't think the Fed will be influenced by Trump's attacks. I think the Fed will take monetary policy on a course that it believes is appropriate, and while I'm sure the Fed wishes Trump wasn't as vocal on monetary policy, it remains an independent body and won't cater to his wishes.