Retirees: Be very, very worried about who will replace Jerome Powell at the Fed

Yahoo

3 days ago

If you're retired, or you're living on passive income from bonds and the like, you have every reason to be grateful to Federal Reserve Chair Jerome Powell. He has fought bitterly for three years to bring inflation back under control and keep it there, a campaign that is absolutely essential to maintaining your standard of living.
And you should be very worried about who President Donald Trump appoints to succeed him next year — and what that will mean for the Fed, inflation and real bond income in the years to follow. Based on what Trump said on Wednesday, he doesn't understand inflation, he doesn't understand the effects of interest rates on the real economy, and he either doesn't understand about retirees and income or he doesn't care.
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Don't believe me? Follow the facts.
Powell and all but two other members of the rate-setting Federal Open Market Committee voted yet again to keep short-term rates on hold at 4.25% to 4.5%. Powell, explaining the decision afterwards, repeated the simple and irrefutable argument he has been making since 2022. In brief: A stitch in time saves nine. It's better to keep rates a little too high now than to be too easy with monetary policy and risk letting inflation back out of the bag.
That's because it is harder — a lot harder — to get inflation back under control than it is to keep it under control.
This is the clear lesson of history. It is not news to anyone who observed Powell and the Fed's error of 2021, when they thought inflation was 'transitory' and let it get too high. It is certainly not news to anyone who remembers the 1970s, when the Fed repeatedly cut rates by too much, too soon, leading to a decade of stagflation.
Powell added that the main reason resurgent inflation is still a risk is because of Trump's tariffs. These have already shown up in higher prices, Powell said, and it is still 'early days.' Prices will rise further in the months ahead as tariffs, which are sales taxes on imports, show up in the prices we all see on the shelves.
For good measure, Powell concluded by pointing out that current interest rates are only 'moderately' restrictive anyway. The job market remains healthy. There are no signs yet of a significant slowdown.
Meanwhile, what did Trump say?
Once again, the president criticized Powell and the Fed for failing to cut short-term rates. And his comments were extraordinary.
'Right now there's no inflation,' the president said. 'We have no inflation.'
Really? This must come as news to anyone who's been shopping lately.
This must come as news to everyone else, too. The Labor Department recently reported that the official inflation rate — meaning the rise in the consumer-price index over the past 12 months — was 2.7%. That's well above the Fed's long-term 2% target, which is precisely why the Fed, and Powell, remain vigilant.
And the real story is worse: The Labor Department reports that consumer prices across the economy rose 0.3% just in the last month, an annualized rate of 3.7%.
Trump's statement that 'there's no inflation' must also come as news to all those investors who own trillions — literally — of dollars in U.S. Treasurys and other bonds. Right now the bond market believes that inflation is running hot and that it will stay hot. It is expected to average 2.5% over the next five years.
If Trump knows something they don't, that inflation is really zero, his family could stop wasting their time betting on the collapse of the U.S. dollar through crypto ventures and throw all their money into long-term Treasury bonds instead. I'd be happy to advise them, in exchange for a very modest fee. (Ivanka, feel free to call. Cash up front, I'm afraid. And no, I don't accept $TRUMP or $MELANIA meme coins either. Sorry.)
A simple exchange-traded fund, the Pimco 25+ Year Zero Coupon U.S. Treasury Index ETF ZROZ, bets on the very longest Treasurys. Based on where the price was in 2020, when inflation collapsed at the start of the COVID crisis, this ETF could reliably be expected to triple if it turns out that the president is right and 'there is no inflation.'
I assume that those who agree with the president that 'there is no inflation' have all their money in ZROZ as well.
Meanwhile, if tariffs are not causing any rise in consumer prices, why then do the president and his Senate MAGA ally Josh Hawley want to spend maybe $150 billion a year of taxpayers' money compensating voters (mostly in red states) for … er … the higher prices caused by tariffs?
Trump complains that by keeping its benchmark rate high, the Fed is keeping mortgage rates high and hurting the U.S. housing market. 'We're keeping the rates high, and it's hurting people from buying houses,' he said.
Heaven help us. The Fed does not set mortgage rates. Quite the contrary: Mortgage rates, and most particularly the interest rate on 30-year fixed-rate mortgages, are based on the interest rates on long-term bonds, not on the Fed's overnight money rates.
And when the bond market sets the interest rate on long-term bonds, its main concern is … the risk of inflation. The more that bondholders worry about long-term inflation, the higher the interest rate they will demand as compensation to lend money for 10, 20 or 30 years.
As a result, by keeping short-term interest rates a little high to crush inflation, Powell is keeping long-term rates down, not pushing them up.
This is why those long-term interest rates suddenly spiked a few weeks ago, when the market thought Trump was about to fire Powell, seize control of the Fed and push it to slash short-term rates.
And it's why mortgage rates, and long-term Treasury yields, kept falling last year as long as the Fed kept short-term interest rates high. The moment the Fed cut rates, last September, those longer-term rates started rising again. (You could think of it like a seesaw.)
Meanwhile, what does Trump think the Fed should do to keep inflation under control? He was asked what would happen if he got his way and the Fed slashed rates, and then inflation rebounded.
'Well, if that happens we just raise them,' Trump replied, referring to short-term rates. 'What you do is you lower them and let's see if there's inflation. … If that happens, what you do is you raise your rates and you do what you have to do to stop inflation.'
This is pretty much what they did in the 1970s. What could go wrong? And if the president really believed that we should 'do what you have to do to stop inflation,' he would be currently supporting the Fed, which is doing exactly that.
Instead, Trump is focusing on the cost to the U.S. government of higher interest rates. Due to the government's massive, unconstrained borrowing over many years, and our gigantic national debt, Trump says that each 1-point cut in short-term rates would save the government $365 billion a year in interest costs.
In other words, Trump wants the Fed to set interest rates for the convenience of the federal government, and of the politicians — particularly the administration — who want to borrow and spend.
Where does he think rates should be? He has in the past suggested they should actually be below 1% right now. On Wednesday he said U.S. rates should be the lowest in the world. ('We should be the lowest interest rate, and we're not. … It's all because of the Fed.')
As Japan and Switzerland now have rates well below 1%, we have to assume Trump wants U.S. rates down there.
Thank heavens there's 'no inflation,' or that might be a total disaster.
Next May, Powell's term as Fed chair will expire and a successor, appointed by Trump, will take over. Whoever the president picks will have to be approved by the Senate. In practice, that means all those fiercely independent, courageous Republican senators. Watch and cheer as they bravely stand up, once again, to the angry folks in red hats back in their home states.
What are the odds we get a Trump puppet running the Fed in a year's time, following the president's advice on interest rates? You make the call.
Meanwhile, ask me why the only U.S. Treasury bonds I hold in my retirement portfolio are TIPS — the ones with inflation protection.
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