New Chair Takes Seat as Government Borrowing, Spending Skyrocket

Jerome “Jay” Powell took the reins of the United States Federal Reserve today, pledging continuity and transparency from the central bank in the wake of continuing good economic performance. After being sworn in, he stressed that monetary policy under his watch would support the nation’s favorably low levels of unemployment and inflation, while remaining vigilant in response to “evolving risks”. The final week of outgoing Chair Janet Yellen’s tenure provided notable examples of such risks, as we shall see below.

The price of gold bumped up $5 per ounce in morning trading while world stock markets fell for a fifth time in the past six days. The Federal Open Market Committee (FOMC) has an interest rate increase on the docket for next month and two more in the forecast drawn up for 2018 under Yellen’s leadership. Despite Mr. Powell’s assurances that he’d continue the Yellen legacy of gradual increases, recent developments in Washington may not afford him the luxury.

Trouble at the Treasury

Documents released by the U.S. Treasury on January 31, 2018 show that the federal government expects to borrow $955 Billion this fiscal year, its highest level since 2012 and some 45% more than it did last year, the highest annual jump in almost 40 years. Furthermore, the Treasury forecasts borrowing of over $1 Trillion in 2019 and over $1.1 Trillion in 2020. At the same time, the Congressional Budget Office says revenues will be lower due to the Trump administration’s massive tax cuts.

The White House contends that the cuts, combined with its plans for a trillion-dollar infrastructure investment, will more than offset the lost revenue with economic activity. But it bears noting that the borrowing already factored in by the Treasury does not include the still-unannounced infrastructure plan, nor any additional spending on the military, disaster relief, or any other domestic programs. The multiplying debt and deficit levels are seen to be at least partly to blame by the ongoing stock market sell-off, with investors wary of inflation ramping up more precipitously.

Watching Powell … and Trump

Much is made of Mr. Powell’s intention, as a “Republican Yellen”, to stay the course laid out by his predecessor in what has widely been hailed as a successful single term that saw a total of 5 modest interest rate hikes. But analysts are already musing that inflationary pressures spurred by titanic levels of government borrowing may force his hand into a more rapid pace of increase, pumping the brakes on economic recovery. On the other hand, President Trump’s stated purpose in breaking with tradition by replacing the Fed Chair instead of re-appointing her to a second term was to “make his mark.” As has been seen with other public institutions that are traditionally at arm’s length from political influence, Mr. Trump has no qualms about making his wishes known and expecting them to be obeyed. The way forward seems anything but predictable.

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