The Federal Reserve and Donald Trump live in strange worlds. We need to examine those worlds. We know that the Fed has abandoned the r* (R-star) and Trump fortunately caved in to Canada.

We know that for Donald Trump and his cronies, as the Doors song goes, women seem wicked when they are unwanted. His son, Donald Jr., feels threatened that the metoo movement will put his sons in danger. Well, maybe danger lurks if they become like dad and grandpa! Yes, there are a few women who frame men. It has always been that way and it is unfortunate, but it is not the norm.

As for economics, we know POTUS has, for the good of North America, been a paper tiger when it came to renegotiating NAFTA.

Fed Supernova

But, really, we have to start with the Fed because, while we know that Donald Trump is bizarre, we did not know that the Fed was becoming strange. Now we learn that the Fed is almost abandoning an essential formula.

It all has to do with the r*. The neutral, natural rate, the sweet spot, which allows neither bubbles nor depressions. Tim Duy is astonished, saying the Fed has unleashed a supernova of hawkishness:

New York Federal Reserve President John Williams, its key proponent, made clear in a speech late Friday that the neutral interest rate is no longer a guiding star for monetary policy. This means a federal funds rate in the range of what is considered neutral has no special significance as far as policy is concerned. That is hawkish relative to any expectations that the Fed would pause as policy rates approach a level that neither stimulates nor restricts the economy. 

And:

Williams now argues that r-star only served as a useful metric when policy rates were far below neutral. Now that policy is closing in on r-star, it actually becomes a less clear concept because of the uncertainty of neutral-rate estimates. 

Clearly, the r* is being abandoned because it may tell us, as Scott Sumner has said, to be more dovish, to take a pause, to stop raising rates which has the tendency to lower the r*.  Then in a downturn, with the r* too high, it becomes more difficult to use lower interest rates to boost the economy as we approach the zero lower bound. Williams said this in 2016:

The critical implication of a lower natural rate of interest is that conventional monetary policy has less room to stimulate the economy during an economic downturn, owing to a lower bound on how low interest rates can go. This will necessitate a greater reliance on unconventional tools like central bank balance sheets, forward guidance, and potentially even negative policy rates. In this new normal, recessions will tend to be longer and deeper, recoveries slower, and the risks of unacceptably low inflation and the ultimate loss of the nominal anchor will be higher (Reifschneider and Williams 2000). 

We have economic weakness, growth in profits due to stock buybacks, a gimmick if you will, and employment growth with low wages. There could be a downturn, and ignoring the r* so close to a potential downturn could prove ominous. It is like the Fed wants to test that water again, making one think whatever they are drinking is not purely water.

Kashkari and Sumner and those who influence the Fed are being tuned out on this one. Powell is commanding a ship cut loose from r* constraints. This gives us even more certainty that the Fed is going to take the economy down although Duy says the captain denies it. 

After all, the Fed looks at inflation. It ignored GDP in the past. We have seen before that the Fed can look at inflation while missing out on the implosion of the GDP. But the Fed is telling us, according to Duy, it will be accommodating to the markets, even if r* were to fall.

The Fed is telling us that r* no longer matters to the level of accommodation given as the Fed raises rates. Kashkari would go apoplectic over this, and he probably already has.

Abandoning the very measure of whether Fed policy is too hot or cold is not exactly economic Goldilocks.

Trump Caves on Trade Silliness

Donald Trump is going off the wheels on a crazy train with regard to tariffs but backed off on NAFTA now known as USMCA. You cannot pronounce that. Very annoying. But worse than that is all this turmoil occurred and the agreement is NAFTA like! 

People are thinking what deal maker. But he is not. He has alienated the Canadians, while giving them a generous auto export quota to the USA of 2.6 million cars per year, and same with Mexico. Those are safe from tariffs. They are higher numbers than are actually exported by Canada and Mexico to the USA. Why were we put through all the fuss?

And no, it is not, as our fantastical POTUS has said, "the greatest deal ever signed"!

The Canadians will let American dairy enter about 3.5 percent of the Canadian market, assuming the pissed off Canadian public would even buy milk with antibiotics in it. And even if it is contained in Yogurt, Canadians will likely look for the "Made in USA" label as one to avoid. This is very bad Public Relations. Trump does not subscribe to normalized ideas of how to win friends and influence people. He has made an entire nation angry.

Pharmacies will be able to keep generic high end, expensive drugs from our neighbors out, and it will damage sick people in America. Consumers will pay more for cars. Steel and aluminum are not yet fixed.

While Trump raises the minimum wage for auto workers in the Northern Hemisphere to 16 dollars per hour, the minimum wage in America remains at $7.25 per hour. Those people won't be able to by the tires for a new car let alone a new car.

But US companies will not be able to buy Canadian media. That is a victory for Canadian sovereignty.

What is POTUS thinking? He got little, and hurt American consumers and Canadian customers with what he did get. Why bother? Why all the fuss? As Scott Sumner says, it is a good thing Wilbur Ross and Peter Navarro are just plain dumb. They are so dumb their economic nationalism did little to hurt North American trade!

Of course, these two clownish economists are not done with Europe or China yet. Maybe they will bumble their way to weak treaties that keep free trade alive. But trade will likely slow as steel, even between North American nations, and cheap auto parts from China to North America, are now subject to tariffs under USMCA.

The team will be negotiating the steel tariffs with Canada and Mexico, and automakers really need something different than what they now have if they want to make cars that will sell around the world.

The only good thing about USMCA is that it reminds me of YMCA and the great song of the same name. I think that is where the trade team resides. They can get a good meal and wash up there. Sorry, it is hard not to be silly when USMCA is so very silly, a serious waste of time and goodwill. 

Village People

Conclusion:

Fed behavior toward its own measurements is certain to turn it hawkish, and mistakes or crashes are almost certain. Trump has given North America a slight reprieve with tariffs, assuming congress does not fiddle with the details in such a way as to create an even more zealous nationalism. Watch congress on this. And things could get ugly with China going forward, as navel cooperation is declining and ships are getting in each other's way. 

For Further Reading:

Fed Governor Cements Looming Economic Destruction

What We Know About the New USMCA Trade Deal