Trump Administration Modifying Stance on Way to G20

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As a candidate, Trump took a hardline.  China is manipulating its currency.  The Federal Reserve is acting to help Clinton get elected.  The jobs data is fake.  

Over the past week, the each of these three positions has been considerably softened.  It is hard not to like the US jobs data.  The February jobs growth exceeded expected, helped by a 28k increase in manufacturing jobs, matching the high from January 2016, which itself was the highest since August 2013. The U-3 measure of unemployment slipped to 4.7%, returning to the cyclical low, while the U-6 measure of underemployment fell to 9.2%, which also matches the cyclical low.  The 2.8% year-over-year increase in hourly earnings is also near the cyclical peak, which is admittedly lower than past cycles. 

The employment data is not fake or politicized.  The BLS reports many components and measures.  There is no right or wrong measure.  The appropriate measure depends on the question one is hoping to be answered.  Like the proverbial drunk and lamp post, the data can use for support or illumination.

Like Bush and Obama, Trump, while on the campaign trail, spoke aggressively against China.  Trump promised to cite China as a currency manipulator, and like Bush and Obama before him has done no such thing.  Treasury Secretary Mnuchin indicated recently that no decision would be made until the regularly scheduled review next month.  By the criteria that the Treasury Department has developed, it will be difficult to claim that China is manipulating its currency.  The intervention has largely been to strengthen not weaken the yuan.  Over the last six and 12 months, the value of China’s exports has fallen.  Last year, China’s trade surplus with the US narrowed.

Confirming a less confrontational approach, Trumps’ strategy and policy adviser Schwarzman, indicated in an interview on CNN that the US President is likely to temper his criticism of China.  What Schwarzman hints at, and the media reports have expanded upon, is that diverse views are represented in the Trump cabinet and among his advisers.  Those that are most rooted in liberal globalism are well presented among the economic advisers and cabinet secretaries.  It does not mean they will carry all arguments and win all policy debates.

This is also clear in how the Trump Administration regards the Federal Reserve.  During the campaign, one might be forgiven for thinking that Trump was running against Yellen.  She was even featured in an add that showed Yellen, Blankfein, and Soros (and some saw as an antisemitic dog whistle).  Trump argued that Yellen had kept interest rates low to help Clinton’s candidacy.  Many thought Yellen would resign or get fired.

This never seemed likely to us.  The President does not have the authority to fire the Fed chair, who is appointed with the consent of the Senate.  If she resigned, she would have been the one impinging the central bank’s independence.  We understood that there was not need for Trump to encroach on the Fed’s independence.  He would be able to exert influence through the power of appointment. In the first 18 months or so, we realized Trump would be able to appoint five of more of the seven governors, including the chair and two vice chairs.

Cohn, Chairman of the National Economic Council, confirmed as much over the weekend.  He acknowledged that the Federal Reserve is going a good job.   There are press reports that continue to play up the conflict between the White House and the Fed.   Applebaum from the New York Times, says today that the two are headed for a collision, “albeit in slow motion.”  This does not seem to be the more helpful description of what is happening.  Fed policy is easy by nearly any metric one chooses.  Real short-term rates remain well below zero.   There is no collision between the Fed’s growing confidence in the US economy and the ability to reach its legislative mandates and a pro-growth Trump Administration.

The Trump Administration has also largely stopped talking about the dollar.  Most of the comments that worried investors took place in confirmation hearings.  There are many currencies that are undervalued against the dollar.  This is a result, we argue, in the contrasting responses to the crisis, and the subsequent divergence of policy.

Many observers and investors may be surprised that the G20 meeting is a smooth event without the kind of disruptions that some had feared.   Trump and Yellen meet tomorrow, and Mnuchin and Schaeuble meet later in the week.  The Obama Administration was increasingly critical of Germany and sought in vain, to encourage it to offset the contraction in the periphery by the new stimulus, not a balanced budget.  The Trump Administration is different in style, but hopes for greater success may rest in German voters’ hands when they go to the polls in September.