It’s the big day! Friday was the first day in the history of the United States of America that we inaugurated a president who was not a vice president, congressman, governor, general, or high executive branch cabinet official. This is pretty significant, and so, for the first time in 228 years, we are trying something different.
President Donald Trump is certainly different in a lot of ways, but not entirely different from presidents of the past, including those whom I would consider successful. President Lyndon Johnson, in another life or time, may have been exactly like Donald Trump. President Trump has lived for “The Deal,” and President Johnson was a master at creating and closing deals. He accomplished a lot, most of which I consider good. President Johnson had little use for “high-minded ideals,” which is what most political leaders practiced at the time. He used to say that high-minded ideals don’t get things done. Action and use of power, when the time is right, are what get things done. LBJ famously once said to his advisors, when they cautioned him on pursuing civil rights because it would bog down his entire presidency, “Well then, what the hell is the presidency for?”
President Trump has already shown us a lot of his style, but perhaps more importantly (since the election), he has shown that he really did grasp the struggles many Americans are experiencing, and his victory reflects that. He trekked across the country during his long campaign and absorbed the degree of hopelessness many are feeling. He has since shown a commitment to acting upon his promises as opposed to just relegating his rhetoric to election sloganeering.
The actions he has taken since the election, such as the dealings with automakers and defense contractors, are being chalked up by many as theatrics and self-promotion. There’s certainly a degree of that, but when you think of it, isn’t that what politicians and leaders do all the time? The important point is, the new president understands the incredible power of his office and is already digging in, not with policy statements but with carrots and sticks only a president, especially a new president, has. Understanding power—and how to use it—is a gift that I would imagine less than half of our previously elected presidents ever had. Trump has it.
However, I think President Trump is going to have a hard time bringing back the amount of decent jobs he wants in order to truly keep the promise. There are only so many times he can pull that rabbit out of the hat (like his dealings with automakers), and I think slapping punitive tariffs on goods and services that the administration feels should have been made in the USA could end up being very counterproductive. The one thing that President Trump doesn’t have, which you really can’t expect him to have yet, is legislative timing. When I ask myself, “What does Donald Trump really care about more: repealing the Affordable Care Act (ACA) or creating jobs with a big fiscal stimulus package?,” I believe it to be the latter. The one thing Washington can agree upon is repealing and replacing ACA is going to be very messy, and putting it as the first legislative priority can jam up the rest of the administration’s initiatives. I think once President Trump realizes this, he will do an about-face and pursue something that keeps his promise to create jobs—a big infrastructure spending package. I don’t think the president will get any friction if he decides to give repealing and replacing ACA more time. A move to a big infrastructure spending bill is a political no-brainer. The president goes from giving people things they want versus taking things away.
Herein lies a problem. Located down the street from the White House at Constitution Avenue and 20th Street sits a building that houses Federal Reserve (the Fed) Chairwoman Janet Yellen. Chairwoman Yellen as well as many of the Federal Reserve Bank presidents and governors have stated repeatedly that they feel the Federal Reserve’s growth and inflation objectives are at or very close to meeting their goals. As recently as this Wednesday, Chairwoman Yellen reminded us of this and cautioned that the Fed will respond appropriately if they feel the economy is running too hot for their liking. Recall that soon after the presidential election, Ms. Yellen also questioned the effectiveness of fiscal stimulus that adds to U.S. government debt when it currently hovers at around 77% of GDP. I believe that when President Trump pivots to fiscal stimulus, there is going to be quite a battle.
Recent history has shown us that this “conflict” between the executive branch and Federal Reserve is not a new phenomenon. In the 1960s, President Johnson, by some accounts, threatened to put Federal Reserve Chairman William Martin through a wall if he didn’t ease policy! President Bill Clinton famously caved in to Alan Greenspan when he wanted to enact his large fiscal stimulus package. This time, the conflict could be very different. Donald Trump has never been one to back down, and politically, he can rain down a public relations firestorm on the Fed that probably hasn’t occurred since Andrew Jackson was president, and President Jackson didn’t have television and Twitter!
However, the Fed is a far more powerful and public institution today than it was in the 1960s. With their control over policy rates and a $5 trillion balance sheet, they can flex a lot of muscle. These are no ordinary times. The Fed has been sleeping with one eye open since they took rates close to zero and bought $5 trillion of treasuries and mortgage-backed securities. They know that anything that threatens to light the trillions of stimulus they have put into the financial system before they can remove it at a measured pace is very dangerous. A large infrastructure spending program at a time of near-full employment seems to be an action that the Fed has identified as such a risk.
The battle will soon be joined. I expect tremendous volatility in 2017.
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