by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with a few words on President Trump’s apparent readiness to fire Federal Reserve Chair Powell. We next review several other international and US developments with the potential to affect the financial markets today, including new measures to protect Canada’s steel industry and Trump’s announcement of a blanket import tariff against about 150 countries around the world.

US Monetary Policy: News reports yesterday said President Trump polled House Republican leaders about whether he should fire Fed Chair Powell, and when they answered affirmatively, he showed them a termination letter that has already been drafted. Trump later denied that he was contemplating Powell’s removal, but we believe he remains intent on eventually replacing Powell with a Fed chair that he thinks would cut interest rates aggressively, even if doing so would risk higher inflation and higher yields on US Treasury obligations.

• Separately, New York FRB President Williams asserted in a speech last night that the Fed’s current interest-rate setting should not yet be eased. According to Williams, “Maintaining this modestly restrictive stance of monetary policy is entirely appropriate” because incoming data now shows that the Trump administration’s big import tariffs are finally starting to push up consumer price inflation.
• The threat of Powell being quickly replaced by an overly dovish new chair temporarily drove US stocks sharply lower yesterday, although they later recovered on Trump’s assertion that he wasn’t planning to fire Powell. Nevertheless, at least some investors remain rattled by the incident. Stock index futures at this moment suggest stock prices will be relatively steady at market open.
• Similarly, investors also sold off the dollar when the news hit yesterday, but the greenback later clawed back its losses and ended little changed. Measured by the US Dollar Index, the currency has appreciated about 0.4% so far this morning.

United States-China: According to the Wall Street Journal today, Beijing has threatened to block the preliminary March deal for Western investors to buy more than 40 ports now owned by Hong-Kong based CK Hutchison, including two key ports associated with the Panama Canal. Beijing is reportedly demanding that Chinese shipping firm Cosco also get an equal stake alongside BlackRock and Mediterranean Shipping Co. BlackRock and MSC are open to the inclusion of Cosco, but Beijing’s late demand could heighten US-China tensions.

Italy: New reports say the government this month will approve spending $15.8 billion for a bridge linking the Italian mainland with the island of Sicily. Importantly, Rome has mulled the idea of counting the bridge funding as defense spending, consistent with the new NATO deal in which member countries have committed to hike their formal defense outlays to 3.5% of gross domestic product and spend an additional 1.5% of GDP on “strategic infrastructure.”

• Through much of the Cold War, the Soviet Union tried to obscure how much it was spending on its military by hiding much of its defense spending in ostensibly civilian budget accounts and off-budget. We have long expected that the European members of NATO could try to do the same thing in reverse, thereby artificially inflating their defense spending to reach the levels demanded by President Trump.
• While that would violate the principle of budget transparency, we note that such spending — on Italy’s big bridge, for example — would still be stimulative to the European economy. Looking forward, we think Europe’s economic prospects have brightened not just because of higher defense spending per se, but because global military and economic threats have spurred it to adopt generally looser fiscal policy and cap regulation.

Canada: Prime Minister Carney yesterday said his government will impose a series of import caps and tariffs against steel from countries other than the US and Mexico, claiming Canada has been “disproportionately open” to steel imports over time. The new policy appears aimed at cushioning the blow for Canadian steel firms dealing with President Trump’s 50% tariff on US steel imports. The policy illustrates how Trump’s embrace of protectionist policies for the US will also probably spur more protectionism by foreign countries, impinging on global trade.

US Fiscal Policy: The Senate overnight narrowly passed a bill to cut $9 billion in federal spending for foreign aid programs and domestic public broadcasting. The bill, which now goes to the House for its approval, essentially rescinds funds previously appropriated for the programs. Although the spending cuts in the bill make up only a tiny share of total federal outlays, the legislation represents an effort to codify some of the controversial cuts pushed by President Trump’s “Department of Government Efficiency” earlier this year.

US Trade Policy: President Trump yesterday said he plans to impose a blanket import tariff of 10% to 15% on about 150 countries around the world. The blanket tariff would evidently apply to the many lower-profile nations that aren’t major US trading partners and haven’t been a focus of the administration so far. Markets appeared to like the news, probably because it suggests a relatively mild US approach to the targeted countries, with less potential trade disruption.

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