OP 2019: Trump tells Powell 'you’re fired'

John Hardy
Head of FX Strategy

Summary:  Long-simmering tensions between US President Donald Trump and the chairman of the Federal Reserve come to a head and Jerome Powell is dismissed. His replacement's new policies shock many people, especially savers.

For the full list of Saxo's 2019 Outrageous Predictions, click here.


At the December 2018 Federal Open Market Committee meeting, Federal Reserve chair
Jerome Powell signs on with a slim majority of voters in favour of a rate hike, even as
corporate credit spreads are spiking higher and equities are showing signs of strain.

The hike is at least one too many and the US economy and US equities promptly drop
off a cliff in Q1’19. Rather than riding to the rescue, the Powel l Fed indicates that it
would be inappropriate to restart the serial bubble-blowing machine former Fed chair
Alan Greenspan revved up as far back as the ‘90s. Instead of another incarnation of
QE, the Powell Fed merely tinkers with the pace of quantitative tightening and a
one-off rate cut.

Powell argues that a clearing of bad debts could have long-term benefits. By the
summer of 2019, with equities in a deep funk and the US yield curve having moved to
outright inversion, an incensed President Trump fires Powell and appoints Minnesota
Fed President Neel Kashkari in his stead.

The ambitious Kashkari was the most consistent Fed dove and critic of tightening US
monetary policy. He is less resistant to the idea of the Fed serving at the government’s
pleasure and is soon dubbed ‘The Great Enabler’, setting President Trump up for a
successful run at a second term in 2020 by promising a $5 trillion credit line to buy
Treasury Secretary Mnuchin’s new zero-coupon perpetual bonds to fund Trump’s
“beautiful” new infrastructure projects and force nominal US GDP back on the path it
lost after the Great Financial Crisis.

Under Kashkari’s bold nominal GDP forcing, nominal GDP growth rises at a 7% clip,
with inflation running at 6% (even if reported at 3%), while Fed policy is all the way
down at 1%. That enables deleveraging you can believe in via fin ancial repression to
the great “joy of debtors and great detriment of savers.
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