Why Central Bank Interest Rate Policy Decisions Will Likely Determine the Next US President

Here is why Central Bank interest rate policy decisions will likely decide if President Trump will be re-elected in November 2020. If we ask what’s next for US stock markets, in a normal year, the answer would be easy. The answer would be that the US S&P 500 should be bound within about a 100-point range in the short-term, at about 2,950 on the upside with support at about 2,850 in the short-term. On the downside, if this short-term support level is broken with a daily market close lower than this level, we can expect further declines, and perhaps rapid declines. With the US DJIA, in a normal year, it should be bound on the upper level at about 26,400 with support at about 25,500, with the same consequences as the S&P 500 if this support is broken with a lower daily market close.

However, we are not in entering a “normal” year, as the next year will be the lead-up to the next Presidential election, and in every year that marked a Presidential election as far back as I can remember during my lifetime, US Central Bankers have always engineered a US stock market rise into the election date to help the incumbent President. However, this is furthermore an abnormal year given the extreme fragility of US markets and the entire global banking system in which the extreme fragility makes stock market manipulation exceedingly more difficult. That said, in the fight between fundamentals and manipulation, in an election year, I am still inclined to give the edge to Central Banker manipulation of markets, with the following disclaimer. The current sitting US President, Donald Trump, has behaved, by far, consistently the most combative to US Central Bankers of any US President in my lifetime, openly calling current US Central Bank Chairman Jerome Powell incompetent and an enemy of the United States every time the US market threatens to revert back to its fundamental status and crash. Consequently, perhaps for the first time in my lifetime, US Central Bankers may refuse to help the sitting President get re-elected with their normal propping up of the US stock markets with favorable Central Bank interest rate policy decisions for all of next year.

On the contrary, they could opt to let the US markets fall considerably into the election in an attempt to oust President Trump. However to do so, with US stock markets already so fragile, they wouldn’t have to necessarily raise the Fed Funds interest rate. Even if they cut interest rates all the way back to zero, as they did by December 2008, I expect the US stock markets to experience some violent downward volatile periods over the next year or so, as we have to remember that US Central Bankers had the benefit of cutting the Fed Funds rate from a high of 5.25% in mid-June 2006 to address the 2008 global financial crisis. With the Fed Funds rate already a very low 2.25%, cutting it back to effectively zero will not be as effective as this policy was in 2008. Consequently, even though for the first time in decades, US Central Bankers are likely seriously discussing whether or not they really want to prop up US stock markets heading into a US Presidential election date next year, even if they did decide affirmatively on this issue, it likely will not matter that much. If US President Trump had the same supportive relationship with the US Central Bank and Wall Street as did former President Obama, then a bet of the S&P500 hitting the 2,950 mark and perhaps even rising to the upper limits of the 3,050 to 3,060 levels before turning down again could be placed with your Las Vegas bookie, with a hefty payout near guaranteed. If the sitting President had the same favorable relationship with Central Bankers as every other US President in my lifetime, then a significant decline of US stock markets could be expected to occur only after the election was over.

This year, however, all of the above abnormal factors will likely lead to an abnormal 12-months in the lead up to the next US Presidential election. To begin, despite any contention that exists between the US Central Bank Chairman Jerome Powell and US President Trump, Central Bankers are currently between a rock and a hard place. Even if they wanted to raise interest rates next year to harm the incumbent US President’s re-election campaign, this desire goes against their mission to devalue the dollar and will likely not outweigh their desire to further slash interest rates in 2020. My longer-term outlook of a deep crash for US stock markets still has not changed, but in the meantime, it’s near guaranteed that US Central Bank interest rate policy decisions will lead to another cut in the Fed Funds rate on 18 September. On 18 September, will the US Central Bank give President Trump the 0.50% interest rate he likely desires or will they stick to a 0.25% interest rate cut, as is currently the much more likely scenario? If they stick to a 0.25% interest rate cut, even if they cut the Fed Funds rate by another additional 0.25% on 30 October, or in November, the key will be to observe the US market’s behavior to these two rate cuts to understand what lies ahead in 2020.

In essence, Central Bank interest rate policy decisions will likely determine the fate of President Trump on 3 November, 2020, because either they will fail miserably due to the law of diminishing returns when it comes to interest rate cuts (my guess for the most likely outcome), or they will effectively artificially raise US stock markets into the 2020 election. At this point, no matter if US Central Bankers despise President Trump, I truly believe that raising interest rates next year is not an option. Given that US Central Bankers have been able to successfully manipulate US stock market behavior with press releases and not even actions, if they truly desired to make President Trump’s life difficult, they could threaten to raise interest rates in their press releases, which would tank US markets, and then slash interest rates in actual behavior, thereby nullifying any potential benefit to President Trump’s re-election campaign next year.

J. Kim

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