Donald Trump discussed various items related to the Federal Reserve and its independence during his campaign and stated he would not nominate Jerome Powell for another term as chair. Join us on Nov. 15 at 2 p.m., Eastern, as Gennadiy Goldberg, head of U.S. rates strategy at TD Securities, discusses what a Trump presidency may mean for the Fed.
Transcription
*Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the corresponding audio for the authoritative record.
Gary Siegel (00:09):
Hi, and welcome to another Bond Buyer Leaders Event. I'm your host Bond Buyer managing editor Gary Siegel. Today we're going to discuss how the election of Donald Trump as president impacts the Federal Reserve. Also, I want to say there'll be no formal answer, question and answer session, so if you have a question, just type it into the q and a box at any point. My guest is Gennadiy Goldberg, head of US rate strategy at TD Securities. Gennadiy, welcome and thank you for joining us.
Gennadiy Goldberg (00:43):
Thanks for having me, Gary.
Gary Siegel (00:45):
My pleasure. So in his press conference after the Fed meeting Fed Chair Jerome Powell said he won't anticipate fiscal or trade policy, but at some point do you think the Fed becomes proactive, anticipating potential implications on monetary policy?
Gennadiy Goldberg (01:09):
I think at some point they'll have to. I think this isn't the point. I think certainly I think the reporters at the press conference were more than happy to start to question Powell about what all these potential policy changes mean for the Fed. It's just a little bit too early. We simply don't know what the administration is going to actually pursue. And it's interesting, you talk to a lot of folks out there and everyone's got a slightly different version of what they expect from Donald Trump. Some expect more aggressive trade immigration policy, some expect very mild trade immigration policy because they're worried about the more aggressive stuff really starting to tank markets. I think for the Fed right now, everything's open, so to speak. Nothing is settled once you get a better sense of how things are forming. So I suspect that after inauguration day on January 20th, we do expect policy announcements to come fast and furious.
(02:07):
I think then you can start to incorporate them into your forward projections for growth for inflation. Then I think the fed's going to start to take notice, but we've still got a couple of months until then unless we know absolutely what is going to happen on day one and we know it has a high likelihood of passage or implementation, it's just too soon. Unfortunately, I think that's the biggest problem here is that they've got bigger things to worry about growth inflation outside of the shock. Powell is very clear to say that they take thousands of other things into account. This is going to be just one of them.
Gary Siegel (02:42):
And of course what a politician says and what a politician winds up doing are two very different things.
Gennadiy Goldberg (02:49):
Exactly, and I think that's the big question on everyone's minds is how much of the, I would say the more, I don't want to call it radical, but some of the more unusual policy agenda like deportations for example, how much of that really gets implemented and what the impact of that is going to be on the US economy, how much of it can be implemented? There's some questions about just logistics of certain policies and whether they come gradually, where they come quickly or how much they cost for example. I think that's the other issue here that no one's talking about.
Gary Siegel (03:27):
Right, and again, that goes to the question of what is said and how it's interpreted. Of course your opponent is going to make it, your opponent is going to make it sound much worse than what you've said, so it remains to be seen.
Gennadiy Goldberg (03:43):
Exactly, exactly.
Gary Siegel (03:46):
So getting back to interest rates, they're still restrictive. Will the election of President Trump lead the Fed to slow the pace of right cuts so that it has more time to consider the uncertainties of trade and tax policies, inflationary pressures and economic resilience as a result?
Gennadiy Goldberg (04:10):
Yeah, that's a really good question. I think it will not the election itself necessarily. I think the interesting thing is going to be really what happens to growth and inflation in the meantime. So these couple of months, even before Donald Trump is inaugurated, what happens to growth and inflation is really anyone's guess and what we've been hearing from the Fed is a little bit more hawkishness. You've been hearing Chair Powell say that there's really no rush to cut rates. You've been hearing the rest of the FMC sound a little bit more hawkish, a little bit more upbeat on the growth data on the consumer, a little bit concern on inflation, maybe not coming down as fast as they'd like it to, but still very much manageable and maybe downplaying some of those fears about the labor market as well. One of those things that we've been kind of keeping a very close eye on is the labor market itself, the unemployment rate that has been slowing down.
(05:12):
Fortunately that data has been extremely noisy due to some hurricane impacts. So what we're going to be doing is actually looking at that over the next couple months to try to see what happens. Our base case is that they still deliver a cut in December, so another 25 base point rate cut is our base case. We do think that starting in January they'll actually start to pause and I think they're starting to set us up for that as well. What you're hearing is more breadcrumbs being dropped by a lot of the FMC members basically saying, don't be surprised if when we get into the new year there is potentially a pause in coming and I will even open it this much. I will say it's even possible that we get a pause in December, it's not our base case, but I can't rule it out immediately or completely.
(05:56):
I just because the Fed could get together and decide we've done enough for now we know policy's still tight, we're still moving in the direction of easier, but we don't have to be quite as quick. So our base case is they cut in December, they actually pause in the first half of the year if 2025 as they start to reassess not just growth and inflation, but really the impact of Trump's policy choices on the US economy, we do think they'll be inflationary. There'll actually be a drag on growth of course. It really highly depends on how they're implemented and what the timeline for them is, but assuming they're implemented day one in terms of tariffs and immigration changes, that is going to be pushing inflation higher and that is going to be starting to make the Fed's job that much more difficult. So once that's through our view is that the Fed will resume rate cuts in the second half of the year.
(06:47):
So this is really kind of a first half, second half story. First half is going to be weight and assess, second half is going to be react more with lower interest rates. The uncertainty on our side is just how fast will we see the impact on the US economy, right? Is this a Q3 story, a Q4 story? We're assuming we see the impact quite fast and furious and that we'll actually see that impact on late Q2 growth, maybe even early q3 and we'll see that almost in real time and the Fed will be able to resume rate cuts if we don't, that resumption of rate cuts could be very, very gradual. So we know that the Fed wants to take rates from tight territory into accommodative territory. It's just a question of what's the speed of that change and they started with 50, which I think confused a whole heck of a lot of folks. That was probably in hindsight unnecessary. I would say they could have done two 20 fives instead, but they've gone 50, they've got another 25, so they're 75 easier we think another 25 in December, and then they can take a pause and reassess as rates stay relatively restrictive but just not quite as restrictive as they were before.
Gary Siegel (07:56):
Well as we know, neutral is a generic term that no one can define. Do you have an estimate as to what neutral is?
Gennadiy Goldberg (08:08):
I've got many estimates, but realistically our thought is it's around 3%. I'm sure if you survey the FMC committee, which they do on a quarterly basis through the summary of economic projections, that neutral rate estimate has been drifting a little bit higher up to it's between half a percentage point and I should say three quarters and a full percentage point. We think in real terms it's probably about 1%. That's where neutral is in nominal terms, assuming a 2% inflation target on top of it, that's about 3%. So somewhere in the vicinity of 3% is where the fed's targeting. Again, a neutral rate with your face, not your toes because it kind of tends to smack you right when you don't expect it. So they're going to be very careful not to actually get too close to it without properly assessing whether the economy is doing better or not. So they'll take it very, very slow as they approach neutral, which means that even if they restart the rate cuts at 25 basis points per meeting, they can actually slow them down even further as they get closer to that 3% level. I think most of the committee, if you look at the dots, is somewhere between two and half and 3%. In nominal terms, that's really what we're expecting as well.
Gary Siegel (09:30):
Will the rotation of voters make any difference?
Gennadiy Goldberg (09:34):
Not really. I think the Fed is largely on the same page. It's actually interesting. I mean both the hawks and the doves are kind of looking at the same numbers. They're interpreting them slightly differently, but you're not really seeing too much of a bias, not so much as we've seen in the past. You've got some pretty notable hawks that are able to rotate on next year, but it's still fairly balanced and I think Powell, along with the core of the committee, including Governor Waller for example, are pretty dynamic. They do adjust to the incoming data, so they're not necessarily acts to do one thing over another. I think Powell has a slight dovish bias generally because he still wants to soft land the economy and become the greatest fed chair who's ever lived. Waller wants to make sure inflation doesn't come back. He's the more, I would say he's extremely pragmatic. If the economy needs additional easing, he'll be for rate cuts. If he sees risk to inflation and growth reaccelerating, he'll be against rate cuts and he'll be probably pro on hold for a while. So it's really quite balanced, I would say.
Gary Siegel (10:47):
So everyone knows that the Fed likes to boast about its independence. President Trump said he wants more say as president on monetary policy, at least he wants the ability to make suggestions to the Fed. Is there a path to this and if so, what would be the impact on the Fed?
Gennadiy Goldberg (11:08):
Interesting. Yeah, I mean this has been kind of all the rage Fed Independence is, believe it or not, a relatively new phenomenon, new in the historical sense. I mean we're really talking in the last half century. He can have input as much as he wants. He can certainly talk to Powell and whoever he chooses to replace Powell with after Powell storm expires. But direct input is something that's reserved for the FMC committee members for the purposes of independence. We know that as soon as you hand the reins over to an interested party, you're going to have dislocations and if the economy is booming, it's going to be in Donald Trump's best interest to make sure that the Fed eases policy and cuts rates. But that might be the opposite of the prescription that you actually need at the time. So he can certainly try, he can appoint someone in Powell's place that's more conducive to taking suggestions, let's put it that way.
(12:08):
But at the end of the day, I mean I really think it's a function of making sure that he's heard and just as a reminder, Trump was the one who elevated Chair Powell in the first place. So this isn't anything new. I think as long as the Fed is moving in the right direction, he's not going to have a too or he is going to have too much trouble with what they're doing because I think their goals align. The Fed wants to soft land this economy and I think President Trump is going to want exactly the same thing.
Gary Siegel (12:38):
Right. So does the implied pressure of a president who wants more say in monetary policy, does that make the Fed's job even tougher than it is?
Gennadiy Goldberg (12:53):
I'll put it to you this way. I wouldn't want their job in good times, and especially not now when they've got a sheer balancing act, I think it makes it a little bit tougher. I think even if they don't take the suggestions at face value, I think it forces them to show their independence. It forces them to justify their decisions, and the good thing about the FOMC is they explain why they do what they're doing. So if there is the perception of interference or anything like that, the markets will start to call them out on it. So I think the danger is not really to the Fed, but actually to markets. Because if you continue to see excessive pressure and influence, for example, on the Fed, you could see long-term interest rates are to rise on expectations that inflation is going to get out of control, for example. So there could be adverse effects not from the F\MC themselves, but just from the markets themselves. If they perceive that there's too much acquiescing to Trump's demands.
Gary Siegel (13:56):
Well, the Fed has come a long way in terms of communication. I remember the days when they didn't make announcements about what they were doing
Gennadiy Goldberg (14:07):
Exactly. They're much more transparent now. You've got a press conference after every meeting, you've got meeting minutes. It's very, I don't want to say easy, but it's much more feasible to figure out if there's some sort of undue pressure going on back when they were adjusting without even telling anyone. They adjusted interest rates and the markets just kind of had to find out for themselves, you have to work for it now. I think they're using that communication as a means of making sure that they're actually setting policy properly and that it's transmitting its way into the real economy.
Gary Siegel (14:44):
The federal deficit is at an all time high. Do you see that continuing to grow? Do you see the, well, not the Fed, the federal government ever cutting down on their spending and doing something about the deficit?
Gennadiy Goldberg (14:58):
I'd love to see them cut down on it. Unfortunately, I don't think there's a lot of fiscal hawks left both on the Republican side and the Democrat side. So I'm very keen to see what exactly happens with the renewal of the 2017 tax cuts. Those are set to expire at the end of calendar 2025, so they've basically got next year to renew those. Now those are going to get renewed, right? Otherwise you're going to have the largest single tax cliff of all time in all of US history. Nobody wants that. Neither side wants to crash the economy that way. So those will get renewed. That means that's at least an extra four to $5 trillion over the next 10 years. Right now, deficits just keep growing and growing and growing. Our projections are you're going to see basically 2 trillion plus deficits per year over the next, at least several years at some point.
(15:52):
The big question is do markets rebel, right? Do treasury buyers decide they're simply not willing to put up with it? Do interest rates in the long end of the curve start to rise this term premium start to rise? Right now, it's been remarkably contained, but as soon as we start to see some of the details of what is being planned, if the tax cuts are viewed as two egregious by markets, the risk that we can see is something akin to what happened in the UK. They had a budget with list trusts. The market really didn't like it rebelled and cost a full blown meltdown of the pension funds. I don't think that's going to happen in the us, but you could see long end rates rise. You could see a lot of undue pressure on the treasury market and that could become much problematic. At the end of the day, I still think at least over the next couple of years, deficits are going to continue to rise and they're going to continue to rise very, very quickly, which is probably going to be an upward pressure on interest rates.
Gary Siegel (16:54):
One of the big things that is part of the tax cuts that Trump initiated is the salt deduction and the cap on salt deductions. Do you have any indication or any thoughts about what will happen with that and what that will mean?
Gennadiy Goldberg (17:13):
From a personal standpoint, I would love to see those reinstated, but it is one of the single most expensive policies of those tax cuts to reinstate. So that would cost, I think the figure is something like six or 700 billion over the next 10 years, and that's quite chunky. In a time when deficits are rising six to 7% of GDP per year, we could see those increased potentially. It's going to be hard to see those uncapped entirely. So the days of the old unlimited salt deduction are probably done. We could see the caps rise from 10,000 to maybe 20,000 or higher. We could see them phased out across income levels, for example. But at the end of the day, it really is up to Congress and it's going to be interesting what happens because the house, while Trump does have the majority in the house, it's really only a couple seats. It's somewhere between one and three or four seats that the Republicans will actually capture in the house. So it's going to require quite a bit of negotiation. The Dems have historically been for it, and that's because a lot of them are representing high tax east and west coast states. So we'll see. I think part of it might be reinstated or increased. Maybe the limits will get increased, but I think it's going to be hard to get the legacy uncapped salt deduction back. I think that's going to be very, very tough.
Gary Siegel (18:45):
This is a little bit off topic, but you mentioned a negotiation. It seems like there is no negotiation in Congress these days. Do you agree? Do you think that it's possibly will start?
Gennadiy Goldberg (19:00):
I think you'll get some sparring that goes on in the house and the Senate, Senate. I think ultimately the parties will acquiesce what I think will bring everyone together in a sense, or eventually I should say. This doesn't mean it's not going to go down on the wire and it's not going to be dramatic because it always is with Congress. What it will probably mean is that you will have some sort of negotiation take place as we get very, very close to the deadline. You've got to renegotiate the debt ceiling next year that we think by around August or September. We think that'll be crucial. So that X date, the point where the treasury runs out of cash could become kind of the flashpoint for when they have to do this. I would say what I'm heartened by is that neither side wants to see these tax cut expire, right?
(19:50):
Neither side wants to willingly create a massive fiscal drag on the economy and economy. That I will say is actually doing quite well, all things considered despite restrictive interest rate policy. So I do think you'll see some negotiations. I agree with you, it has never been more polarized than it is now. So it's going to be quite interesting to see whatever this negotiation is going to be. But I still think it's in everyone's best interest for both sides to come together and renew the 2017 tax cuts, and I think that's the baseline plan. We'll see how offsides that comes in six months time. Of course,
Gary Siegel (20:33):
Gennadiy, how have market fundamentals shifted at all since the Fed started cutting rates and where do they go from here?
Gennadiy Goldberg (20:44):
I would say growth has done much better than I would've anticipated. The level of restriction that the Fed put in, I mean we're talking 525 basis points of rate hikes over the course of 14 months. It's quite chunky. The market's done remarkably well with that. Economic fundamentals have been okay, so the way I see things now is inflation is not quite back under control, but it is very close to being back under control. I think the fed's been very keen to avoid pulling a George Bush moment and saying mission accomplished because they know how that ends. So they'll talk around it. I do think inflation is on its way down towards the 2% target. It might get stuck a little bit towards around two and a half percent, but that's not bad. Given that we were talking about seven or 8% inflation recently. That's pretty good.
(21:39):
Growth has done okay. A lot of that is being driven by consumption and consumers are still spending a lot of those excess savings that they developed during the pandemic. And there's really kind of a bifurcation of the US consumer. There's a low income consumer and a high income consumer. The low income consumers struggle, right? They're seeing default rates rise, they're seeing delinquency rates rise. So there is some struggle at the bottom. The top is not seeing that struggle. They tend to own their homes. They tend to have locked in their mortgages around 3%. There is still excess spending out there, and I think that's what's driving a lot of this economic growth activity. So the fundamentals are not terrible. The one thing that worries me is the labor market because it is gradually slowing down. You are seeing the three month, the six month pace of job growth on a monthly basis really start to slow down over time, and I do think that's the main reason behind the Fed continuing to cut rates on a gradual basis. If it wasn't for that, if the labor market stabilized, I think you would have the Fed basically keeping rates on hold and just waiting for something to soften, right? That's the most obvious glaring area of softening for me.
Gary Siegel (22:53):
So the next summary of economic projections is released in December. Do you expect major changes in monetary policy projections?
Gennadiy Goldberg (23:04):
Not really. They've already been very waffly on their own expectations. I mean, if you look at the September SEP for example, it was very 50 50 in terms of the number of FOMC members. It was really 50% plus one that we're seeing another two rate cuts after September, and just about half the committee was not even seeing another two rate cuts this year. Next year was quite more moderate as well. So I think you'll have a bit of an evolution, not necessarily a revolution, and I think you'll see that long run dot potentially continue to drift higher over the course of the next few.
Gary Siegel (23:47):
So we have a question from the audience. Some of the tax reform topics, impact rates, specifically the corporate tax rate, well they have to negotiate in 2025. Any sense whether those tax rates could continue to decline, for example, to 15%?
Gennadiy Goldberg (24:08):
Well, listening to Donald Trump on the campaign stump, they certainly want that. I think it's going to be hard to do that given the fiscal dynamics. I think you can't have everything that you want. I think corporate rates are still relatively low. It's going to be hard to get them down. I will say this is a very important point. Even if they allow the 2017 tax cuts to lapse, those corporate rates do not revert to their pre 2017 TCJA decrease. So they're going to stay at that lower rate already. I think there's a possibility of them going just a little bit lower from here, but in reality, it's really what the administration wants to do on the consumer tax side or on the personal tax side. If they want tax relief for tip income, for example, if they want tax relief for social security income, it's going to be tough for them to pass. Also relief for corporate taxes, even a couple of percentage points.
Gary Siegel (25:14):
What are the biggest risks to the bond market?
Gennadiy Goldberg (25:20):
I mean, certainly the inability of the Fed to stop inflation. I think that's going to be the big one for me, if you think about it that way. I think issuance is also a risk. I mean, this is one of those understated risks that I keep getting asked about. When does the market care about this ongoing wall of supply that keeps coming? Six to 7% of GDP fiscal deficits are not viewed as highly sustainable. They can be sustainable for a while and then potentially not. So I do think that the risk is that the market really starts to price in a lot of term premium, and that you start to see a lot more yield that the treasury has to pay to finance themselves both in the front end of the curve and the long end of the curve. And that could actually push up interest rates across the board, right? Because the US treasury market is the baseline for basically all global markets, to some extent, it could actually push interest rates higher across a number of categories. So it could make corporate bond financing, for example, even more expensive because investors may refuse to accept a lower spread on that product. So it could basically raise all borrowing rates across the board. So it's your typical classic crowding out theory. That's an econ 1 0 1, and I think that is a big risk, especially as we keep running these massive deficits.
Gary Siegel (26:47):
We have another question from the audience. Gennadiy. Is it possible we end the Fed movement wins out before the term is all said and done?
Gennadiy Goldberg (26:56):
No, I think I'll be a little bit more forceful. I'll quote Chair Powell on that one when he was asked if he'll step down if Trump wants him out, and he'll say, he basically just said, no, it's going to be tough. I mean, I think the Fed has a lot more functions these days than meets the eye. I mean, they have regulatory functions, market stability functions and things like that. It's going to take a majority in Congress to basically abolish the Fed. I think that's still a very far cry from where things are going. And by the way, markets are not take that well. So if we're talking about a president who loves to look at the stock market as a barometer of how things are going, I would suspect that would be a 15 to 20% hit on equity markets in a very short span of time, and I think they would back off that very quickly.
Gary Siegel (27:53):
We're running short on time, so this will be the last question. What are your clients asking and what are they most concerned about
Gennadiy Goldberg (28:02):
These days? It's really twofold. One is the economic fundamentals that we were talking about earlier. So really what happens to growth in inflation now? More so it's what do we expect from a second Trump term? How much of immigration policy and tariff policy actually gets implemented? How quickly, what is the impact on the macro fundamentals? There's just a lot of uncertainty going into next year as it was. The election brings even more uncertainty about that, and unfortunately, everyone kind of assumed we'd have a lot of clarity after the election results were in. Well, they're basically in minus some house races that are still being counted, and we still don't know. So I think we'll have to wait until early next year to get a better sense of exactly what some of this administration's policies are going to be and whether we should be worried or whether we should be looking at this economy and saying, wow, this is a really robust exuberant economy and it can continue to grow for some time. So there's lots and lots of uncertainty about even the direction of economic growth, which is quite interesting as you're heading into year end and as everyone's publishing their 2025 outlooks, including us.
Gary Siegel (29:17):
Well, that concludes our Leaders event. I'd like to thank my guest, Gennadiy Goldberg, head of US Rate Strategy, at TD Securities, and I'd like to thank all the audience for tuning in today. Have a good afternoon everyone.
Gennadiy Goldberg (29:34):
Thanks, Gary.
Gary Siegel (29:36):
Thank you.
