Trump’s ‘big, beautiful bill’ will further increase the budget deficit and the chance that Fed boss Powell will have to step down early, says Mark Dowding of asset manager RBC BlueBay Asset Management in his weekly newsletter.
The US budget deficit will probably increase to around 7% of GDP, even if $250 billion in revenue from import duties and relatively robust economic growth are taken into account. Without concrete austerity plans, a reduction in the budget deficit will mainly depend on lower interest rates on the capital market.
For the time being, however, financing costs are still showing an upward trend, because old government bonds with low coupons are being replaced by new debt paper with higher coupons. As a result, the White House will probably increase the pressure on the Federal Reserve to lower interest rates further this summer.
“Powell has so far resisted this political interference and in his testimony to Congress this week, the Fed chairman was happy to stress that he would have advocated further rate cuts were it not for US trade policy and the threat it poses to inflation.”
Powell further inflamed Trump by also voicing concerns about the US’s unsustainable debt. Dowding: “And so it seems that the talk of an early appointment of Powell’s successor will intensify in the coming weeks.”
The prospect of a new, “dovish” Fed chairman cutting rates could be good for short-term rates, according to the CIO, but will be a concern for long-term rates, due to the potential threat to price stability and a weakening of the Fed’s inflation mandate.
